(1) “Physical damage,” in addition to its ordinary meaning, shall include the total or partial alteration, damage, obliteration, or erasure of records, information, data, computer programs, or their computer representations, which are recorded for use in computers or the impairment, interruption, or interference with the use of such records, information, data, or computer programs, or the impairment, interruption, or interference with the use of any computer or services provided by computers. “Physical damage” also includes any diminution in the value of any property as the consequence of an act;
(2) If more than one item of property is physically damaged as a result of a common scheme or plan by a person and the physical damage to the property would, when considered separately, constitute mischief in the third degree because of value, then the value of the damages may be aggregated in one count. If the sum of the value of all the physical damages exceeds two hundred fifty dollars, the defendant may be charged with and convicted of malicious mischief in the second degree.
(1) A person is guilty of computer trespass in the first degree if the person, without authorization, intentionally gains access to a computer system or electronic data base of another; and
(a) The access is made with the intent to commit another crime; or
(b) The violation involves a computer or data base maintained by a government agency.
(2) Computer trespass in the first degree is a class C felony.
(1) A person is guilty of computer trespass in the second degree if the person, without authorization, intentionally gains access to a computer system or electronic data base of another under circumstances not constituting the offense in the first degree.
(2) Computer trespass in the second degree is a gross misdemeanor.
A person who, in the commission of a computer trespass, commits any other crime may be punished for that other crime as well as for the computer trespass and may be prosecuted for each crime separately.
This act shall be known and may be cited as the “West Virginia Computer Crime and Abuse Act.” (1989, c. 47.)
The Legislature finds that:
(a) The computer and related industries play an essential role in the commerce and welfare of this state.
(b) Computer-related crime is a growing problem in business and government.
(c) Computer-related crime has a direct effect on state commerce and can result in serious economic and, in some cases, physical harm to the public.
(d) Because of the pervasiveness of computers in today’s society, opportunities are great for computer related crimes through the introduction of false records into a computer of computer system, the unauthorized use of computers and computer facilities, the alteration and destruction of computer, computer programs and computer data, and the theft of computer resources, computer software and computer data.
(e) Because computers have now become an integral part of society, the Legislature recognizes the need to protect the rights of owners and legitimate users of computers and computer systems, as well as the privacy interest of the general public, from those who abuse computers and computer systems.
(f) While various forms of computer crime or abuse might possibly be the subject of criminal charges or civil suits based on other provisions of law, it is appropriate and desirable that a supplemental and additional statute be provided which specifically proscribes various forms of computer crime and abuse and provides criminal penalties and civil remedies therefor. (1989, c. 47.)
As used in this article, unless the context clearly indicates otherwise:
(a) “Access” means to instruct, communicate with, store data in, retrieve data from, intercept data from, or otherwise make use of any computer, computer network, computer program, computer software, computer data or other computer resources.
(b) “Authorization” means the express or implied consent given by a person to another to access or use said person’s computer, computer network, computer program, computer software, computer system, password, identifying code or personal identification number.
(c) “Computer” means an electronic, magnetic, optical, electrochemical, or other high speed data processing device performing logical, arithmetic, or storage functions, and includes any data storage facility or communication facility directly related to or operating in conjunction with such device. The term “computer” includes any connected or directly related device, equipment or facility which enables the computer to store, retrieve or communicate computer programs, computer data or the results of computer operations to or from a person, another computer or another device, but such term does not include an automated typewriter or typesetter, a portable hand-held calculator or other similar device.
(d) “Computer data” means any representation of knowledge, facts, concepts, instruction, or other information computed, classified, processed, transmitted, received, retrieved, originated, stored, manifested, measured, detected, recorded, reproduced, handled, or utilized by a computer, computer network, computer program or computer software, and may be in any medium, including, but not limited to, computer printouts, microfilm, microfiche, magnetic storage media, optical storage media, punch paper tape or punch cards, or it may be stored internally in read-only memory or random access memory of a computer or any other peripheral device.
(e) “Computer network” means a set of connected devices and communication facilities, including more than one computer, with the capability to transmit computer data among them through such communication facilities.
(f) “Computer operations” means arithmetic, logical, storage, display, monitoring or retrieval functions or any combination thereof, and includes, but is not limited to, communication with, storage of data in or to, or retrieval of data from any device and the human manual manipulation of electronic magnetic impulses. A “computer operation” for a particular computer shall also mean any function for which that computer was designed.
(g) “Computer program” means an ordered set of computer data representing instructions or statements, in a form readable by a computer, which controls, or otherwise influences the functioning of a computer or computer network.
(h) “Computer software” means a set of computer programs, procedures and associated documentation concerned with computer data or with the operation of a computer, computer program, or computer network.
(i) “Computer services” means computer access time, computer data processing, or computer data storage, and the computer data processed or stored in connection therewith.
(j) “Computer supplies” means punchcards, paper tape, magnetic tape, magnetic disks or diskettes, optical disks or diskettes, disk or diskette packs, paper, microfilm, and any other tangible input, output or storage medium used in connection with a computer, computer network, computer data, computer software or computer program.
(k) “Computer resources” includes, but is not limited to, information retrieval; computer data processing transmission and storage; and any other functions performed, in whole or in part, by the use of a computer, computer network, computer software, or computer program.
(l) “Owner” means any person who owns or leases or is a licensee of a computer, computer network, computer data, computer program, computer software, computer resources or computer supplies.
(m) “Person” means any natural person, general partnership, limited partnership, trust, association, corporation, joint venture, or any state, county or municipal government and any subdivision, branch, department or agency thereof.
(n) “Property” includes:
(1) Real property;
(2) Computers and computer networks;
(3) Financial instruments, computer data, computer programs, computer software and all other personal property regardless of whether they are:
(i) Tangible or intangible;
(ii) In a format readable by humans or by a computer;
(iii) In transit between computers or within a computer network or between any devices which comprise a computer; or
(iv) Located on any paper or in any device on which it is stored by a computer or by a human; and
(4) Computer services.
(o) “Value” means having any potential to provide any direct or indirect gain or advantage to any person.
(p) “Financial instrument” includes, but is not limited to, any check, draft, warrant, money order, note, certificate of deposit, letter of credit, bill of exchange, credit or debit card, transaction authorization mechanism, marketable security or any computerized representation thereof.
(q) “Value of property or computer services” shall be (1) the market value of the property or computer services at the time of a violation of this article; or (2) if the property or computer services are unrecoverable, damaged, or destroyed as a result of a violation of section three or four [§ 61-3C-3 or § 61-3C-4] of this article, the cost of reproducing or replacing the property or computer services at the time of the violation. (1989, c. 47.)
Any person who, knowingly and willfully, directly or indirectly, accesses or causes to be accessed any computer, computer services or computer network for the purpose of (1) executing any scheme or artifice to defraud or (2) obtaining money, property or services by means of fraudulent pretenses, representations or promises shall be guilty of a felony, and, upon conviction thereof, shall be fined not more than ten thousand dollars or imprisoned in the penitentiary for not more than ten years, or both. (1989, c. 47.)
Any person who knowingly, willfully and without authorization, directly or indirectly, accesses or causes to be accessed a computer or computer network with the intent to obtain computer services shall be guilty of a misdemeanor, and, upon conviction thereof, shall be fined not less than two hundred dollars nor more than one thousand dollars or confined in the county jail not more than one year, or both. (1989, c. 47.)
(a) Any person who knowingly, willfully and without authorization possesses any computer data or computer program belonging to another and having a value of five thousand dollars or more shall be guilty of a felony, and upon conviction thereof, shall be fined not more than ten thousand dollars or imprisioned in the penitentiary for not more than ten years, or both.
(b) Any person who knowingly, willfully and without authorization possesses any computer data or computer program belonging to another and having a value of less than five thousand dollars shall be guilty of a misdemeanor, and, upon conviction thereof, shall be fined not more than one thousand dollars or confined in the county jail for not more than one year, or both. (1989, c. 47)
Any person who knowingly, willfully and without authorization, directly or indirectly, tampers with, deletes, alters, damages or destroys or attempts to tamper with, delete, alter, damage or destroy any computer, computer network, computer software, computer resources, computer program or computer data shall be guilty of a felony, and, upon conviction thereof, shall be fined not more than ten thousand dollars or confined in the penitentiary not more than ten years, or both, or, in the discretion of the court, be fined not less than two hundred nor more than one thousand dollars and confined in the county jail not more than one year. (1989, c. 47)
Any person who knowingly, willfully and without authorization, directly or indirectly, disrupts or degrades or causes the disruption or degradation of computer services or denies or causes the denial of computer services to an authorized recipient or user of such computer services, shall be guilty of a misdemeanor, and, upon conviction thereof, shall be fined not less than two hundred nor more than one thousand dollars or confined in the county jail not more than one year, or both. (1989, c. 47)
Any person who knowingly, willfully and without authorization possesses any computer data, computer software, computer supplies or a computer program which he knows or reasonably should know was obtained in violation of any section of this article shall be guilty of a misdemeanor, and, upon conviction thereof, shall be fined not less than two hundred dollars and not more than one thousand dollars or confined in the county jail for not more than one year, or both. (1989, c. 47.)
Any person who knowingly, willfully and without authorization discloses a password, identifying code, personal identification number or other confidential information about a computer security system to another person shall be guilty of a misdemeanor, and, upon conviction thereof, shall be fined not more than five hundred dollars or confined in the county jail for not more than six months or both. (1989, c. 47.)
Any person who knowingly, willfully and without authorization accesses or causes to be accessed any computer or computer network and thereby obtains information filed by any person with the state or any county or municipality which is required by law to be kept confidential shall be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than five hundred dollars or confined in the county jail not more than six months, or both. (1989, c. 47.)
Any person who knowingly, willfully and without authorization accesses a computer or computer network and examines any employment, salary, credit or any other financial or personal information relating to any other person, after the time at which the offender knows or reasonably should know that he is without authorization to view the information displayed, shall be guilty of a misdemeanor, and, upon conviction thereof, shall be fined not more than five hundred dollars or confined in the county jail for not more than six months, or both. (1989, c. 47.)
(a) As used in this section, the following terms shall have the following meanings:
(1) “Access device” means any card, plate, code, account number, or other means of account access that can be used, alone or in conjunction with another access device, to obtain money, goods, services, or any other thing of value, or that can be used to initiate a transfer of funds (other than a transfer originated solely by paper instrument);
(2) “Counterfeit access device” means any access device that is counterfeit, fictitious, altered, or forged, or an identifiable component of an access device or a counterfeit access device;
(3) “Unauthorized access device” means any access device that is lost, stolen, expired, revoked, canceled, or obtained without authority;
(4) “Produce” includes design, alter, authenticate, duplicate, or assemble;
(5) “Traffic” means transfer, or otherwise dispose of, to another, or obtain control of with intent to transfer or dispose of.
(b) Any person who knowingly and willfully possesses any counterfeit or unauthorized access device shall be guilty of a misdemeanor, and, upon conviction thereof, shall be fined not more than one thousand dollars or confined in the county jail for not more than six months, or both.
(c) Any person who knowingly, willfully and with intent to defraud possesses a counterfeit or unauthorized access device or who knowingly, willfully and with intent to defraud, uses, produces or traffics in any counterfeit or unauthorized access device shall be guilty of a felony, and, upon conviction thereof, shall be fined not more than ten thousand dollars or imprisoned in the penitentiary for not more than ten years, or both.
(d) This section shall not prohibit any lawfully authorized investigative or protective activity of any state, county or municipal law-enforcement agency. (1989, c. 47.)
Any person who accesses a computer or computer network and knowingly, willfully and without authorization (a) interrupts or impairs the providing of services by any private or public utility; (b) interrupts or impairs the providing of any medical services; (c) interrupts or impairs the providing of services by any state, county or local government agency, public carrier or public communication service; or otherwise endangers public safety shall be guilty of a felony, and, upon conviction thereof, shall be fined not more than fifty thousand dollars or imprisoned not more than twenty years, or both. (1989, c. 47.)
The creation, alteration or deletion of any computer data contained in any computer or computer network, which if done on a tangible document or instrument would constitute forgery under section five [§ 61-4-5], article four, chapter sixty-one of this code will also be deemed to be forgery. The absence of a tangible writing directly created or altered by the offender shall not be a defense to any crime set forth in section five, article four, chapter sixty-one if a creation, alteration or deletion of computer data was involved in lieu of a tangible document or instrument. (1989, c. 47.)
(a) Any person whose property or person is injured by reason of a violation of any provision of this article may sue therefor in circuit court and may be entitled to recover for each violation:
(1) Compensatory damages;
(2) Punitive damages; and
(3) Such other relief, including injunctive relief, as the court may deem appropriate.
Without limiting the generality of the term, “damages” shall include loss of profits.
(b) At the request of any party to an action brought pursuant to this section, the court may, in its discretion, conduct all legal proceedings in such a manner as to protect the secrecy and security of the computer network, computer data, computer program or computer software involved in order to prevent any possible recurrence of the same or a similar act by another person or to protect any trade secret or confidential information of any person. For the purposes of this section “trade secret” means the whole or any portion or phase of any scientific or technological information, design, process, procedure or formula or improvement which is secret and of value. A trade secret shall be presumed to be secret when the owner thereof takes measures to prevent it from becoming available to persons other than those authorized by the owner to have access thereto for a limited purpose.
(c) The provisions of this section shall not be construed to limit any person’s right to pursue any additional civil remedy otherwise allowed by law.
(d) A civil action under this section must be commenced before the earlier of: (1) Five years after the last act in the course of conduct constituting a violation of this article; or (2) two years after the plaintiff discovers or reasonably should have discovered the last act in the course of conduct constituting a violation of this article. (1989, c. 47.)
(a) In any criminal prosecution under this article, it shall be a defense that:
(1) The defendant had reasonable grounds to believe that he had authority to access or could not have reasonably known he did not have authority to access the computer, computer network, computer data, computer program or computer software in question; or
(2) The defendant had reasonable grounds to believe that he had the right to alter or destroy the computer data, computer software or computer program in question; or
(3) The defendant had reasonable grounds to believe that he had the right to copy, reproduce, duplicate or disclose the computer data, computer program, computer security system information or computer software in question.
(b) Nothing in this section shall be construed to limit any defense available to a person charged with a violation of this article. (1989, c. 47.)
For the purpose of criminal and civil venue under this article, any violation of this article shall be considered to have been committed:
(1) In any county in which any act was performed in furtherance of any course of conduct which violates this article;
(2) In the county of the principal place of business in this state of the aggrieved owner of the computer, computer data, computer program, computer software or computer network, or any part thereof;
(3) In any county in which any violator had control or possession of any proceeds of the violation or any books, records, documentation, property, financial instrument, computer data, computer software, computer program, or other material or objects which were used in furtherance of or obtained as a result of the violation;
(4) In any county from which, to which, or through which any access to a computer or computer network was made, whether by wires, electromagnetic waves, microwaves or any other means of communication; and
(5) In the county in which the aggrieved owner or the defendant resides or either of them maintains a place of business. (1989, c. 47.)
Criminal prosecution pursuant to this article shall not prevent prosecution pursuant to any other provision of law. (1989, c. 47.)
Any person who violates any provision of this article and, in doing so, accesses, permits access to, causes access to or attempts to access a computer, computer network, computer data, computer resources, computer software or computer program which is located, in whole or in part, within this state, or passes through this state in transit, shall be subject to criminal prosecution and punishment in this state and to the civil jurisdiction of the courts of this state. (1989, c. 47.)
If any provision of this article or the application thereof to any person or circumstance is held invalid, such invalidity shall not affect any other provisions or applications of this article which can be given effect without the invalid provision or application, and to that end the provisions of this article are declared to be severable. (1989, c. 47.)
(1) Definitions. In this section:
(a) “Computer” means an electronic device that performs logical, arithmetic and memory functions by manipulating electronic or magnetic impulses and includes all input, output, processing, storage, computer software and communication facilities that are connected or related to a computer in a computer system or computer network.
(b) “Computer network” means the interconnection of communication lines with a computer through remote terminals or a complex consisting of 2 or more interconnected computers.
(c) “Computer program” means an ordered set of instructions or statements that, when executed by a computer, causes the computer to process data.
(d) “Computer software” means a set of computer programs, procedures or associated documentation used in the operation of a computer system.
(dm) “Computer supplies” means punchcards, paper tape, magnetic tape, disk packs, diskettes and computer output, including paper and microform.
(e) “Computer system” means a set of related computer equipment, hardware or software.
(f) “Data” means a representation of information, knowledge, facts, concepts or instructions that has been prepared or is being prepared in a formalized manner and has been processed, is being processed or is intended to be processed in a computer system or a computer network. Data may be in any form including computer printouts, magnetic storage media, punched cards and as stored in the memory of the computer. Data are property.
(g) “Financial instrument” includes any check, draft, warrant, money order, note, certificate of deposit, letter of credit, bill of exchange, credit or credit card, transaction authorization mechanism, marketable security and any computer representation of them.
(h) “Property” means anything of value, including but not limited to financial instruments, information, electronically produced data, computer software and computer programs.
(i) “Supporting documentation” means all documentation used in the computer system in the construction, clarification, implementation, use or modification of the software or data.
(2) Offenses against computer data and programs.
(a) Whoever wilfully, knowingly and without authorization does any of the following may be penalized as provided in par. (b):
1. Modifies data, computer programs or supporting documentation.
2. Destroys data, computer programs or supporting documentation.
3. Accesses data, computer programs or supporting documentation.
4. Takes possession of data, computer programs or supporting documentation,
5. Copies data, computer programs or supporting documentation.
6. Discloses restricted access codes or other restricted access information to unauthorized persons.
(b) Whoever violates this subsection is guilty of:
1. A Class A misdemeanor unless subd. 2, 3 or 4 applies.
2. A Class E felony if the offense is committed to defraud or to obtain property.
3. A Class D Felony if the damage is greater than $2,500 or if it causes an interruption or impairment of governmental operations or public communication, of transportation or of a supply of water, gas or other public service.
4. A Class C felony if the offense creates a substantial and unreasonable risk of death or great bodily harm to another.
(3) Offenses against computers, computer equipment or supplies.
(a) Whoever wilfully, knowingly and without authorization does any of the following may be penalized as provided in par. (b):
1. Modifies computer equipment or supplies that are used or intended to be used in a computer, computer system or computer network.
2. Destroys, uses, takes or damages a computer, computer system, computer network or equipment or supplies used or intended to be used in a computer, computer system, or computer network.
(b) Whoever violates this subsection is guilty of:
1. A Class A misdemeanor unless subd. 2, 3 or 4 applies.
2. A Class E felony if the offense is committed to defraud or obtain property.
3. A Class D felony if the damage to the computer, computer system, computer network, equipment or supplies is greater than $2,500.
4. A Class C felony if the offense creates a substantial and unreasonable risk of death or great bodily harm to another.
(4) Computer use restriction. In addition to the other penalties provided for violation of this section, a judge may place restrictions on the offender’s use of computers. The duration of any such restrictions may not exceed the maximum period for which the offender could have been imprisoned; except if the offense is punishable by forfeiture, the duration of the restrictions may not exceed 90 days.
(5) Injunctive relief. Any aggrieved party may sue for injunctive relief under ch. 813 to compel compliance with this section. In addition, owners, lessors, users or manufacturers of computers, or associations or organizations representing any of those persons, may sue for injunctive relief to prevent or stop the disclosure of information which may enable another person to gain unauthorized access to data, computer programs or supporting documentation.
(a) As used in this article:
(i) “Access” means to approach, instruct, communicate with, store data in, retrieve data from, or otherwise make use of any resources of a computer, computer system or computer network;
(ii) “Computer” means an internally programmed, automatic device which performs data processing;
(iii) “Computer network” means a set of related, remotely connected devices and communication facilities including more than one (1) computer system with capability to transmit data among them through communication facilities;
(iv) “Computer program” means an ordered set of data representing coded instructions or statements which when executed by a computer cause the computer to process data;
(v) “Computer software” means a set of computer programs, procedures and associated documentation concerned with the operation of a computer system;
(vi) “Computer system” means a set of related, connected or unconnected, computer equipment, devices or computer software;
(vii) “Computer system services” means providing a computer system or computer network to perform useful work;
(viii) “Financial instrument” means a check, draft, money order, certificate of deposit, letter of credit, bill of exchange, credit card or marketable security;
(ix) “Intellectual property” means data, including programs;
(x) “Property” includes financial instruments, information, electronically produced data, computer software and programs in machine-readable or human-readable form;
(xi) “Trade secret” means the whole or a portion or phase of a formula, pattern, device, combination of devices or compilation of information which is for use, or is used in the operation of a business and which provides the business an advantage or an opportunity to obtain an advantage over those who do not know or use it. “Trade secret” includes any scientific, technical or commercial information including any design, process, procedure, list of suppliers, list of customers, business code or improvement thereof. Irrespective of novelty, invention, patentability, the state of the prior art and level of skill in the business, art or field to which the subject matter pertains, when the owner of a trade secret takes measures to prevent it from becoming available to persons other than those selected by the owner to have access to it for limited purposes, the trade secret is considered to be:
(A) Secret;
(B) Of value;
(C) For use or in use by the business; and
(D) Providing an advantage or an opportunity to obtain an advantage to the business over those who do not know or use it.
(a) A person commits a crime against intellectual property if he knowingly and without authorization:
(i) Modifies data, programs or supporting documentation residing or existing internal or external to a computer, computer system or computer network;
(ii) Destroys data, programs or supporting documentation residing or existing internal or external to a computer, computer system or computer network;
(iii) Discloses or takes data, programs, or supporting documentation having a value of more than seven hundred fifty dollars ($750.00) and which is a trade secret or is confidential, as provided by law, residing or existing internal or external to a computer, computer system or computer network.
(b) A crime against intellectual property is:
(i) A felony punishable by imprisonment for not more than three (3) years, a fine of not more than three thousand dollars ($3,000.00), or both, except as provided in paragraph (ii) of this subsection;
(ii) A felony punishable by imprisonment for not more than ten (10) years, a fine of not more than ten thousand dollars ($10,000.00), or both, if the crime is committed with the intention of devising or executing a scheme or artifice to defraud or to obtain property.
(a) A person commits a crime against computer equipment or supplies if he knowingly and without authorization modifies equipment or supplies used or intended to be used in a computer, computer system or computer network. A crime against computer equipment or supplies is:
(i) A misdemeanor punishable by imprisonment for not more than six (6) months, a fine of not more than seven hundred fifty dollars ($750.00), or both, except as provided in paragraph (ii) of this subsection;
(ii) A felony punishable by imprisonment for not more than ten (10) years, a fine of not more than ten thousand dollars ($10,000.00), or both, if the crime is committed with the intention of devising or executing a scheme or artifice to defraud or to obtain property.
(b) A person who knowingly and without authorization destroys, injures or damages a computer, computer system or computer network and thereby interrupts or impairs governmental operations or public communication, transportation or supplies of water, as or other public service, is guilty of a felony punishable by imprisonment for not more than three (3) years, a fine of not more than three thousand dollars ($3,000.00), or both.
(a) A person commits a crime against computer users if he knowingly and without authorization:
(i) Accesses a computer, computer system or computer network;
(ii) Denies computer system services to an authorized user of the computer system services which, in whole or part, are owned by, under contract to, or operated for, on behalf of, or in conjunction with another.
(b) A crime against computer users is:
(i) A felony punishable by imprisonment for not more than three (3) years, a fine of not more than three thousand dollars ($3,000.00), or both except as provided in paragraph (ii) of this subsection;
(ii) A felony punishable by imprisonment for not more than ten (10) years, a fine of not more than ten thousand dollars ($10,000.00), or both, if the crime is committed with the intention of devising or executing a scheme or artifice to defraud or to obtain property.
This article shall not preclude the application of any other provision of the criminal law of this state which applies, or may apply, to any violation of this article, unless the provision is inconsistent with this article. provision of the criminal law of this state which applies, or may apply, to any violation of this article, unless the provision is inconsistent with this article.
Whoever embezzles, steals, purloins, or knowingly converts to his use or the use of another, or without authority, sells, conveys or disposes of any record, voucher, money, or thing of value of the United States or of any department or agency thereof, or any properly made or being made under contract for the United States or any department or agency thereof; or
Whoever receives, conceals, or retains the same with intent to convert it to his use or gain, knowing it to have been embezzled, stolen, purloined or converted—
Shall be fined not more than $10,000 or imprisoned not more than ten years, or both; but if the value of such property does not exceed the sum of $100, he shall be fined not more than $1,000 or imprisoned not more than one year, or both.
The word “value” means face, par, or market value, or cost price, either wholesale or retail, whichever is greater.
Whoever, within the special maritime and territorial jurisdiction of the United States, takes and carries away, with intent to steal or purloin, any personal property of another shall be punished as follows:
If the property taken is of a value exceeding $100, or is taken from the person of another, by a fine of not more than $5,000, or imprisonment for not more than five years, or both; in all other cases, by a fine of not more than $1,000 or by imprisonment not more than one year, or both.
If the property stolen consists of any evidence of debt, or other written instrument, the amount of money due thereon, or secured to be paid thereby and remaining unsatisfied, or which in any contingency might be collected thereon, or the value of the property the title to which is shown thereby, or the sum which might be recovered in the absence thereof, shall be the value of the property stolen.
Whoever, in any matter within the jurisdiction of any department or agency of the United States knowingly and willfully falsifies, conceals or covers up by any trick, scheme, or device a material fact, or makes any false, fictitious or fraudulent statements or representations, or makes or uses any false writing or document knowing the same to contain any false, fictitious or fraudulent statement or entry, shall be fined not more than $10,000 or imprisoned not more than five years, or both.
(a) Whoever—
(1) knowingly and with intent to defraud produces, uses, or traffics in one or more counterfeit access devices;
(2) knowingly and with intent to defraud traffics in or uses one or more unauthorized access devices during any one-year period, and by such conduct obtains anything of value aggregating $1,000 or more during that period;
(3) knowingly and with intent to defraud possesses fifteen or more devices which are counterfeit or unauthorized access devices; or
(4) knowingly, and with intent to defraud, produces, traffics in, has control or custody of, or possesses device-making equipment;
shall, if the offense affects interstate or foreign commerce, be punished as provided in subsection (c) of this section.
(b)
(1) Whoever attempts to commit an offense under subsection (a) of this section shall be punished as provided in subsection (c) of this section.
(2) Whoever is a party to a conspiracy of two or more persons to commit an offense under subsection (a) of this section, if any of the parties engages in any conduct in furtherance of such offense, shall be fined an amount not greater than the amount provided as the maximum fine for such offense under subsection (c) of this section or imprisoned not longer than one-half the period provided as the maximum imprisonment for such offense under subsection (c) of this section, or both.
(c) The punishment for an offense under subsection (a) or (b)(1) of this section is—
(1) a fine of not more than the greater of $10,000 or twice the value obtained by the offense or imprisonment for not more than ten years, or both, in the case of an offense under subsection (a)(2) or (a)(3) of this section which does not occur after a conviction for another offense under either such subsection, or an attempt to commit an offense punishable under this paragraph;
(2) a fine of not more than the greater of $50,000 or twice the value obtained by the offense or imprisonment for not more than fifteen years, or both, in the case of an offense under subsection (a)(1) or (a)(4) of this section which does not occur after a conviction for another offense under either such subsection, or an attempt to commit an offense punishable under this paragraph; and
(3) a fine of not more than the greater of $100,000 or twice the value obtained by the offense or imprisonment for not more than twenty years, or both, in the case of an offense under subsection (a) of this section which occurs after a conviction for another offense under such subsection, or an attempt to commit an offense punishable under this paragraph.
(d) The United States Secret Service shall, in addition to any other agency having such authority, have the authority to investigate offenses under this section. Such authority of the United States Secret Service shall be exercised in accordance with an agreement which shall be entered into by the Secretary of the Treasury and the Attorney General.
(e) As used in this section—
(1) the term “access device” means any card, plate, code, account number, or other means of account access that can be used, alone or in conjunction with another access device, to obtain money, goods, services, or any other thing of value, or that can be used to initiate a transfer of funds (other than a transfer originated solely by paper instrument);
(2) the term “counterfeit access device” means any access device that is counterfeit, fictitious, altered, or forged, or an identifiable component of an access device or a counterfeit access device;
(3) the term “unauthorized access device” means any access device that is lost, stolen, expired, revoked, canceled, or obtained with intent to defraud;
(4) the term “produce” includes design, alter, authenticate, duplicate, or assemble;
(5) the term “traffic” means transfer, or otherwise dispose of, to another, or obtain control of with intent to transfer or dispose of; and
(6) the term “device-making equipment” means any equipment, mechanism, or impression designed or primarily used for making an access device or a counterfeit access device.
(f ) This section does not prohibit any lawfully authorized investigative, protective, or intelligence activity of a law enforcement agency of the United States, a State, or a political subdivision of a State, or of an intelligence agency of the United States, or any activity authorized under chapter 224 of this title. For purposes of this subsection, the term “State’ includes a State of the United States, the District of Columbia, and any commonwealth, territory, or possession of the United States.
(a) Whoever—
(1) knowingly accesses a computer without authorization or exceeds authorized access, and by means of such conduct obtains information that has been determined by the United States Government pursuant to an Executive order or statute to require protection against unauthorized disclosure for reasons of national defense or foreign relations, or any restricted data, as defined in paragraph y. of section 11 of the Atomic Energy Act of 1954, with the intent or reason to believe that such information so obtained is to be used to the injury of the United States, or to the advantage of any foreign nation;
(2) intentionally accesses a computer without authorization or exceeds authorized access, and thereby obtains information contained in a financial record of a financial institution, or of a card issuer as defined in section 1602(n) of title 15, or contained in a file of a consumer reporting agency on a consumer, as such terms are defined in the Fair Credit Reporting Act (
15 U.S.C. 1681 et seq.);
(3) intentionally, without authorization to access any computer of a department or agency of the United States, accesses such a computer of that department or agency that is exclusively for the use of the Government of the United States or, in the case of a computer not exclusively for such use, is used by or for the Government of the United States and such conduct affects the use of the Government’s operation of such computer;
(4) knowingly and with intent to defraud, accesses a Federal interest computer without authorization, or exceeds authorized access, and by means of such conduct furthers the intended fraud and obtains anything of value, unless the object of the fraud and the thing obtained consists only of the use of the computer;
(5) intentionally accesses a Federal interest computer without authorization, and by means of one or more instances of such conduct alters, damages, or destroys information in any such Federal interest computer, or prevents authorized use of any such computer or information, and thereby—
(A) causes loss to one or more others of a value aggregating $1,000 or more during any one year period; or
(B) modifies or impairs, or potentially modifies or impairs, the medical examination, medical diagnosis, medical treatment, or medical care of one or more individuals; or
(6) knowingly and with intent to defraud traffics (as defined in section 1029) in any password or similar information through which a computer may be accessed without authorization, if—
(A) such trafficking affects interstate or foreign commerce; or
(B) such compute is used by or for the Government of the United States;
shall be punished as provided in subsection (c) of this section.
(b) Whoever attempts to commit an offense under subsection (a) of this section shall be punished as provided in subsection (c) of this section.
(c) The punishment for an offense under subsection (a) or (b) of this section is—
(1)
(A) a fine under this title or imprisonment for not more than ten years, or both, in the case of an offense under subsection (a)(1) of this section which does not occur after a conviction for another offense under such subsection, or an attempt to commit an offense punishable under this subparagraph; and
(B) a fine under this title or imprisonment for not more than twenty years, or both, in the case of an offense under subsection (a)(1) of this section which occurs after a conviction for another offense under such subsection, or an attempt to commit an offense punishable under this subparagraph; and
(2)
(A) a fine under this title or imprisonment for not more than one year, or both, in the case of an offense under subsection (a)(2), (a)(3) or (a)(6) of this section which does not occur after a conviction for another offense under such subsection, or an attempt to commit an offense punishable under this subparagraph; and
(B) a fine under this title or imprisonment for not more than ten years, or both, in the case of an offense under subsection (a)(2), (a)(3) or (a)(6) of this section which occurs after a conviction for another offense under such subsection, or an attempt to commit an offense punishable under this subparagraph; and
(3)
(A) a fine under this title or imprisonment for not more than five years, or both, in the case of an offense under subsection (a)(4) or (a)(5) of this section which does not occur after a conviction for another offense under such subsection, or an attempt to commit an offense punishable under this subparagraph; and
(B) a fine under this title or imprisonment for not more than ten years, or both, in the case of an offense under subsection (a)(4) or (a)(5) of this section which occurs after a conviction for another offense under such subsection, or an attempt to commit an offense punishable under this subparagraph.
(d) The United States Secret Service shall, in addition to any other agency having such authority, have the authority to investigate offenses under this section. Such authority of the United States Secret Service shall be exercised in accordance with an agreement which shall be entered into by the Secretary of the Treasury and the Attorney General.
(e) As used in this section—
(1) the term “computer” means an electronic, magnetic, optical, electrochemical, or other high speed data processing device performing logical, arithmetic, or storage functions, and includes any data storage facility or communications facility directly related to or operating in conjunction with such device, but such term does not include an automated typewriter or typesetter, a portable hand held calculator, or other similar device;
(2) the term “Federal interest computer” means a computer—
(A) exclusively for the use of a financial institution or the United States Government, or, in the case of a computer not exclusively for such use, used by or for a financial institution or the United States Government and the conduct constituting the offense affects the use of the financial institution’s operation or the Government’s operation of such computer; or
(B) which is one of two or more computers used in committing the offense, not all of which are located in the same State;
(3) the term “State” includes the District of Columbia, the Commonwealth of Puerto Rico, and any other commonwealth, possession or territory of the United States;
(4) the term “financial institution” means—
(A) an institution with deposits insured by the Federal Deposit Insurance Corporation;
(B) the Federal Reserve or a member of the Federal Reserve including any Federal Reserve Bank;
(C) a credit union with accounts insured by the National Credit Union Administration;
(D) a member of the Federal home loan bank system and any home loan bank;
(E) any institution of the Farm Credit System under the Farm Credit act of 1971;
(F) a broker-dealer registered with the Securities and Exchange Commission pursuant to section 15 of the Securities Exchange Act of 1934;
(G) the Securities Investor Protection Corporation;
(H) a branch or agency of a foreign bank (as such terms are defined in paragraphs (1) and (3) of section 1(b) of the International Banking Act of 1978); and
(I) an organization operating under section 25 or section 25(a) of the Federal Reserve Act.
(5) the term “financial record” means information derived from any record held by a financial institution pertaining to a customer’s relationship with the financial institution;
(6) the term “exceeds authorized access” means to access a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled so to obtain or alter; and
(7) the term “department of the United States” means the legislative or judicial branch of the Government or one of the executive departments enumerated in section 101 of title 5.
(f) This section does not prohibit any lawfully authorized investigative, protective, or intelligence activity of a law enforcement agency of the United States, a State, or a political subdivision of a State, or of an intelligence agency of the United States.
Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, or to sell, dispose of, loan, exchange, alter, give away, distribute, supply, or furnish or procure for unlawful use any counterfeit or spurious coin, obligation, security, or other article, or anything represented to be or intimated or held out to be such counterfeit or spurious article, for the purpose of executing such scheme or artifice or attempting so to do, places in any post office or authorized depository for mail matter, any matter or thing whatever to be sent or delivered by the Postal Service, or takes or receives therefrom, any such matter or thing, or knowingly causes to be delivered by mail according to the direction thereon, or at the place at which it is directed to be delivered by the person to whom it is addressed, any such matter or thing, shall be fined not more than $1,000 or imprisoned not more than five years, or both. If the violation affects a financial institution, such person shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.
Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice, shall be fined not more than $1,000 or imprisoned not more than five years, or both. If the violation affects a financial institution, such person shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.
Whoever knowingly executes, or attempts to execute, a scheme or artifice—
(1) to defraud a financial institution; or
(2) to obtain any of the moneys, funds, credits, assets, securities or other property owned by or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises;
shall be fined not more than $1,000,000, or imprisoned not more than 30 years, or both.
For the purposes of this chapter, the term “scheme or artifice to defraud” includes a scheme or artifice to deprive another of the intangible right of honest services.
(a) Whoever willfully and unlawfully conceals, removes, mutilates, obliterates, or destroys, or attempts to do so, or, with intent to do so takes and carries away any record, proceeding, map, book, paper, document, or other thing, filed or deposited with any clerk or officer of any court of the United States, or in any public office, or with any judicial or public officer of the United States, shall be fined not more than $2,000 or imprisoned not more than three years, or both.
(b) Whoever, having the custody of any such record, proceeding, map, book, document, paper, or other thing, willfully and unlawfully conceals, removes, mutilates, obliterates, falsifies, or destroys the same, shall be fined not more than $2,000 or imprisoned not more than three years, or both; and shall forfeit his office and be disqualified from holding any office under the United States.
As used in this chapter:
“Aircraft” means any contrivance now known or hereafter invented, used, or designed for navigation of or for flight in the air;
“Cattle” means one or more bulls, steers, oxen, cows, heifers, or calves, or the carcass or carcasses thereof;
“Money” means the legal tender of the United States or of any foreign country, or any counterfeit thereof;
“Motor vehicle” includes an automobile, automobile truck, automobile wagon, motorcycle, or any other self-propelled vehicle designed for running on land but not on rails;
“Securities” includes any note, stock certificate, bond, debenture, check, draft, warrant, traveler’s check, letter of credit, warehouse receipt, negotiable bill of lading, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate; valid or blank motor vehicle title; certificate of interest in property, tangible or intangible; instrument or document or writing evidencing ownership of goods, wares, and merchandise, or transferring or assigning any right, title, or interest in or to goods, wares, and merchandise; or, in general, any instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, warrant, or right to subscribe to or purchase any of the foregoing, or any forged, counterfeited, or spurious representation of any of the foregoing;
“Tax stamp” includes any tax stamp, tax token, tax meter imprint, or any other form of evidence of an obligation running to a State, or evidence of the discharge thereof;
“Value” means the face, par, or market value, whichever is the greatest, and the aggregate value of all goods, wares, and merchandise, securities, and money referred to in a single indictment shall constitute the value thereof.
Whoever transports, transmits, or transfers in interstate or foreign commerce any goods, wares, merchandise, securities or money, of the value of $5,000 or more, knowing the same to have been stolen, converted or taken by fraud; or
Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transports or causes to be transported, or induces any person or persons to travel in, or to be transported in interstate or foreign commerce in the execution or concealment of a scheme or artifice to defraud that person or those persons of money or property having a value of $5,000 or more; or
Whoever, with unlawful or fraudulent intent, transports in interstate or foreign commerce any falsely made, forged, altered, or counterfeited securities or tax stamps, knowing the same to have been falsely made, forged, altered, or counterfeited; or
Whoever, with unlawful or fraudulent intent transports in interstate or foreign commerce any traveler’s check bearing a forged countersignature; or
Whoever, with unlawful or fraudulent intent, transports in interstate or foreign commerce, any tool, implement, or thing used or fitted to be used in falsely making, forging, altering, or counterfeiting any security or tax stamps, or any part thereof—
Shall be fined not more than $10,000 or imprisoned not more than ten years, or both.
This section shall not apply to any falsely made, forged, altered, counterfeited or spurious representation of an obligation or other security of the United States, or of an obligation, bond, certificate, security, treasury note, bill, promise to pay or bank note issued by any foreign government. This section also shall not apply to any falsely made, forged, altered, counterfeited, or spurious representation of any bank note or bill issued by a bank or corporation of any foreign country which is intended by the laws or usage of such country to circulate as money.
Footnotes — Appendix 4A[36]:
* Some of this material adapted is from
Prevention and Prosecution of Computer and High Technology Crime (Matthew Bender & Co. 1991).
* The bill enacting section 16-9-93.1, signed into law on 30 April 1996, stated in section 2 that the statute would not prohibit a member of the General Assembly from using the Georgia flag or state seal on a home page clearly identified with the member’s name as the member’s home page. Section 3 of that bill stated that all laws and parts of laws in conflict with the Act were repealed (without identifying any such laws).
Article 1.
In order to protect the rights and interests of creators of computer software, to adjust the relationships of interest during the development, dissemination and use of computer software, and to promote the development of computer applications, these regulations are enacted in accordance with the provisions of the copyright Law of the PRC.
Article 2.
For the purposes of these regulations computer software (hereinafter referred to as software) refers to computer programs and related documentation.
Article 3.
For the purposes of these regulations computer software (hereinafter referred to as software) refers to computer programs and related documentation.
Meanings of the following words used in these regulations are:
(1) computer programs: refers to coded instructional sequences —or those symbolic instructional sequences or numeric language sequences which can be automatically converted into coded instructional sequences —which are for the purpose of obtaining a certain result and which are operated on information processing equipment such as computers.
Computer programs include source code programs and object code programs. The source code text of a piece of software and its object code text should be seen as one work.
(2) documentation: refers to written materials and diagrams, using natural language or formal language, which are used to describe the contents, organization, design, functions and specifications, development circumstances, testing results, and method of use of the program, for example: program design explanations, flow charts, user manuals, etc.
(3) software developers: refers to those legal persons or units which are not legal persons (hereinafter referred to as units) who actually organize, undertake the work of development, and (or ?) provide working conditions, to complete the development of software and who take responsibility for the software; citizens who rely on their own conditions to complete software and who take responsibility for the software.
(4) software copyright owners: refers to those units and citizens who, in accordance with these regulations, enjoy the copyright of a computer software.
(5) reproduction: refers to the act of transferring software into a material form.
Article 4.
The provision of protection to computer software, as referred to in these regulations, refers to [the fact] that computer software copyright holders or transferees enjoy all the rights of copyright stipulated in these regulations.
Article 5.
Software which enjoys protection under these regulations must be independently developed by the developer and must already be in material form.
Article 6.
Chinese citizens and units enjoy the copyright under these regulations for software they have developed, regardless of whether it has been published and regardless of where it has been published.
Foreigner’s software first published in China enjoys the copyright under these regulations.
Software published outside of China by foreigners enjoys copyright in China and protection under these regulations according to a bilateral agreement signed between the country to which it belongs and China or according to international conventions to which they are both parties.
Article 7.
The protection provided to software under these regulations cannot be expanded to encompass the ideas, concepts, discoveries, principles, algorithims, processing methods, and operations used in the development of computer software.
Article 8.
The State Council’s designated software registration agency administers the registration of software throughout the entire country.
Article 9.
Software copyright holders enjoy the following rights:
(1) right of publication, is the right to decide whether the software should be released to the public;
(2) developer’s right of authorship, is the right to indicate the developer’s identity and to place his name on the software;
(3) the right of use, is the right to use the software by copying, demonstrating, distributing, altering, translating, annotating, etc., under the precondition of not harming the public interest;
(4) the right of licensing use and receiving remuneration, is the right to license others, under provision 3 of this article, to use the entire software or a part of it, and the right to get remuneration for this;
(5) the right of transfer, is the right to transfer to others the right of use and right of licensing under provisions 3 and 4 of this article.
Article 10.
The copyright of a software belongs to its developer, where [these] regulations have specific stipulations those should be followed [sic ].
Article 11.
Where software is developed jointly by two or more units, citizens, except as provided for in a separate agreement, the copyright of the software shall be jointly enjoyed by the developers.
Exercise of the copyright co-developers shall be carried out in accordance with any written agreement reached prior to creation of the software. If there is no written agreement and if the jointly developed software can be used in separate parts, the co-developers can seperately enjoy the copyright on the parts they developed, but during the exploitation of the copyright this may not be extended to the copyright of the jointly developed work in its entirety. If the jointly developed software cannot be used in separate parts, the co-developers may exploit the copyright by consensus. If consensus cannot be reached, and in the absence of any unusual reasons, neither party can prevent the other from implementing its exclusive rights, with the exception of the right of transfer to a third party. However, any benefits earned shall be fairly distributed among the co-authors.
Article 12.
The copyright of software which is commissioned to be developed by another person, shall be governed by any written agreement signed between the person who commissioned the work and the person who undertook the commission; if there is no written agreement or if it is not clearly stipulated in the agreement, the copyright shall be enjoyed by the person undertaking the commission.
Article 13.
The copyright of software which is developed pursuant to tasks assigned by a legal person’s superior organization or government department shall be based on stipulations contained in the project task document or contract; if not clearly stipulated in the project task document or contract, the copyright belongs to the organization to which the task was assigned.
With regard to software which possesses major significance for national or public security interests and is developed by organizations within this system or organizations under their jurisdiction, responsible departments of the State Council or the People’s Governments of Provinces, autonomous regions, or centrally administered cities have the right to permit designated organizations to use the software. The organization using such software will pay a fee according to relevant national regulations.
Article 14.
If software developed by a citizen while working in an organization is the product of work executed for the organization, is developed in accordance with the clearly stipulated development goals for work in the organization, or is the predictable or natural result of activities involved in the organization’s work, then the software’s copyright belongs to the organization.
If software developed by a citizen is not the result of work executed for the organization, has no direct relationship to the content of work at the organization in which the developer is engaged, and does not use the organization’s material technical conditions, [then] the software’s copyright belongs to the developer himself.
Article 15.
The term of protection of software copyright is 25 years, ending on the 31st of December of the twenty-fifth year after the first publication of the software. Prior to the fulfillment of the term of protection, the software copyright holder may apply to the software registration administration organization to extend the protection by 25 years, although the period of protection may not exceed 25 years at the longest.
There is no limit on the period of protection of the software developer’s right of authorship.
Article 16.
During term of copyright protection of a given piece of software, the software copyright holder’s heir may, in accordance with relevant provisions in the “People’s Republic of China Inheritance Law,” inherit the rights in Items 3 and 4 of Article 9 of these regulations.
The act of inheritance may not change the term of protection of the rights of the software.
Article 17.
During the term of copyright protection of a given piece of software, after a change has occurred in the organization which holds the software’s copyright, the succeeding organization legally will enjoy all the rights to the software.
The occurrence of succession will not change the term of protection of the software’s rights.
Article 18.
During the software copyright’s term of protection, the software copyright holder or his transferee may authorize others to implement the right of use Article 9, Item 3, of these regulations. Software copyright holders or their transferees may receive a fee while they are authorizing others to implement the right of use.
Authorization to implement a software copyright should be agreed and executed according to China’s laws and regulations in the form of a written contract. The authorized person should implement the right of use within the form, conditions, scope, and period of the contract.
The period of effectiveness [of] an authorizing contract may not exceed 10 years. When the period is complete, the contract may be extended.
The act of authorization cited, described above, does not alter ownership of software copyright.
Article 19.
During the software copyright period of protection, those who enjoy the rights of use and license under Article 9, Items 3 and 4, may transfer the rights of use and license to other people.
Authorization to transfer copyright should be carried out in accordance with laws and regulations of China under a signed and executed written contract.
The act of transfer does not alter ownership of software copyright.
Article 20.
When the term of validity of a software copyright expires, all rights to the software cease, except for the developer’s right of authorship.
In the event that any circumstances fit either of the following situations, all rights to a given piece of software, except the right of authorship, will enter the public domain prior to the end of the term of protection:
- the organization holding the software copyright terminates (dissolves) and there is no legal successor;
- The citizen holding the software copyright dies without a legal heir.
Article 21.
Those organizations or citizens who legally own reproductions of software have the right, without obtaining consent of the proprietary owner […]:
(1) to install and use in a computer according to the needs of use;
(2) for the purpose of maintaining files, [to] make a back-up copy. However, these back-up copies may not be provided to other persons by any means. Once the owners lose the rights legally to own this software, these reference copies must be completely destroyed.
(3) […] to carry out necessary revisions for the purpose of using said software in the real computer environment or improving its performance. However, except in cases where there is additional agreement, (the owner) may not provide to any third party the revised document, without the agreement of the software copyright holder or his legal transferee.
Article 22.
For the non-commercial purposes of work conducted in classroom education, scientific research, the execution of legal duties by state organs, etc., a small number of software reproductions may be made, without obtaining the consent of the software copyright owner or his legal transferee, and without giving compensation. However, when used, the name of the software and its developer must be stated, and none of the rights enjoyed by the copyright owners or transferees under the terms of these regulations shall be violated. After the use of these copies is ended, they should be appropriately managed, taken back, or destroyed. They must not be used for other purposes or given to other persons.
Article 23.
[Developer of software] published after these regulations are promulgated may [make] application for registration at the copyright registration administration organization. After approval of registration, the Software Registration Administration Organization will issue documents of proof of registration and make public notice (of the registration).
Article 24.
Registration of software copyrights with the software registration administration organization in accordance with these regulations is the prerequisite for administrative treatment of rights disputes or of lawsuits.
Documents of proof of registration issued by the Software Registration Administration Organization are the initial documents certifying that a software copyright is in effect or is in the process of applying for registration.
Article 25.
When applying for registration computer software copyright holders must provide:
(1) A software copyright registration form filled out in accordance with the regulations;
(2) software identifying material in keeping with the rules.
Software copyright holders must pay a registration fee according to the rules.
Specific software registration administration methods and fee standards will be announced by the Software Registration Administration Organization.
Article 26.
Software copyright may be cancelled in either of the following situations:
- according to final judicial judgement;
- when primary information provided during the registration application is acknowledged not to be authentic.
Article 27.
For any computer software which has already been registered, when activities relating to transfer of software rights occur, the receiver should put on record with the National Software Registration Administration Organization within three months of the signing of the contract of transfer, otherwise infringement activities by third parties cannot be contested.
Article 28.
When a Chinese national software copyright owner licenses or transfers to a foreigner rights to software developed within China’s territory, he shall first make a request for approval to the relevant responsible organs of the State Council and also make a report to the Software Registration Administration Organization.
Article 29.
Other than to carry out registration administration responsibilities, employees who work in software registration and persons who have previously worked in this position, may not, during the period of protection of a software copyright, utilize or reveal to any other person the file material or other relevant information provided at the time of the application for registration.
Article 30.
Except for the situations described in Articles 21 and 22, in the event of the following infringing activities, according to conditions cessation of the infringement, elimination of the effects, public apology, compensation for losses and other civil responsibilities should be undertaken; moreover, state software copyright executive administration departments may adopt executive punishments such as confiscating unearned illegal income, fines, etc.:
(1) publishing software works without the consent of the software copyright owner;
(2) taking software developed by others and publishing it in one’s own name;
(3) taking software developed in cooperation with another person and publishing it as work completed by oneself alone, without the permission of the cooperating developer;
(4) signing one’s name to software developed by another person or altering the signature on software developed by another;
(5) revising, translating, or annotating software without the permission of the software copyright owner or his legal transferee;
(6) copying software, in whole or in part, without the permission of the software copyright owner or his legal transferee;
(7) disseminating or revealing software to the public without the permission of the software copyright owner or his legal transferee;
(8) effecting the licensing or transfer of software to a third party without the permission of the software copyright owner or his legal transferee.
Article 31.
Resulting similarities between software developed and software already in exsistence does not constitute a violation of the copyright of exsisting software in the following situations:
(1) because it is necessary for the execution of national policies, laws, and rules and regulations;
(2) because it is necessary for the setting of technical standards;
(3) because of the limited categories of forms of expression.
Article 32.
If a software owner is unaware that or has no reasonable basis to believe that the software infringes on a software product right, the responsibility for the violation shall be borne by the rights violator who provided the software. However, when failure to destroy the infringed software will not adequately protect the rights and interests of the software copyright owner, the owner has a duty to destroy the infringing software, so that losses may be forced back onto the provider of the infringing software.
The provider of the infringing software cited in the previous provision is a person who knows the software is an infringement and supplies it to others.
Article 33.
A concealed party who does not carry out his duty or who carries it out not in accordance with prescribed conditions shall bear civil responsibilities according to the General Procedures of the Civil Law.
Article 34.
Software copyright disputes may be mediated. If mediation fails to produce an agreement, or if it produces agreement which one party fails to honor, a lawsuit may be brought before a People’s Court. A concerned party who is unwilling to enter into mediation may also bring a lawsuit before a People’s Court.
Article 35.
A software copyright contract dispute may be mediated. It may also be applied for mediation by the state software copyright arbitration organization, on the basis of an arbitration provision in the contract or a written arbitration agreement concluded after the contract.
Concerned parties will carry out an arbitration ruling. If one party fails to carry out an arbitration ruling, the other may bring a lawsuit before a People’s Court.
If the People’s Court receiving the application discovers that the arbitration ruling is illegal, it has the power not to execute the ruling. If the People’s Court does not carry out the ruling, concerned parties may bring a lawsuit before the People’s Court [i.e., appeal].
If concerned parties have not inserted an arbitration clause into the contract, and there is no written arbitration agreement after the event, they may bring a lawsuit directly before the People’s Court.
Article 36.
If a concerned party is dissatisfied with the remedial decisions of the national copyright executive administrative department, he may bring suit before the People’s Court within three months from receipt of notice. When this period has expired and no lawsuit has been brought, the national copyright executive administrative department may apply to the People’s Court to force action.
Article 37.
Software registration administration organizations will assess administrative punishment against employees of software registration administration organizations who have violated Article 29 of these regulations. If the circumstances are severe, constituting a crime, judicial organs are responsible for investigating the crime.
Article 38.
Infringement actions which take place prior to these regulations taking effect should be dealt with in accordance with regulations in effect at the time of the infringing activity.
Article 39.
These regulations will be interpreted by the State Council’s department for software registration administration and software copyright administration departments.
Article 40.
These provisions take effect from October 1, 1991.
The following paper was presented by Professor Shinichi Yamanaka in May 1994 at a conference in Beijing, China, sponsored by LES China, and at which David Bender spoke on US database protection. This paper is reprinted here with the kind permission of Professor Yamanaka.
Copyright 1994 Shinichi Yamanaka
“PROTECTING DATABASES—TRENDS IN JAPAN ”
Shinichi Yamanaka,
Associate Professor
School of International and Business Law
Yokohama National University
1. Introduction—Copyright Amendment in 1986 In 1986, Japan amended its copyright law to specifically recognize databases. This does not mean databases had not been protected in Japan until 1986. Until that time databases were protected as compilations, as was, and is the case in many other countries.
There were two main reasons for the amendment. First, the amendment was made in response to the inherent characteristics of a database, that is digitalized information of many kinds of works which can be retrieved with the aid of a computer. Because of such characteristics, the intellectual creation of a database does not lie in the mere selection or arrangement of its contents as is with other compilations, rather it lies in how to retrieve and use information easily and efficiently with the aid of computer. Thus, elements such as the systematic construction of information and the selection and giving of keywords are important for the creation of databases. In accordance with this criteria the following definition was added.
Article 2 (Definition)—1—Xte1
“databases” means an aggregation of information such as articles, numericals or diagrams, which is systematically constructed so that such information can be retrieved with the aid of a computer;
Article 12bis
Databases which, by reason of the selection or systematic construction of information contained therein, constitute intellectual creations which shall be protected as independent works.
The second reason for the amendment was the increase in on-line database services. On-line database services are conducted via the transmission of the contents of a database by wire at the request of a user. The right of communication to the public by wire was one of the bundle of rights given to copyright prior to 1986, but it was not clear whether the right of communication to the public by wire meant only the communication of the cable programs for simultaneous reception by the public or it included transmission at the request of a user. In the 1986 amendment it was made clear that the author had two types of rights; communication to the public by wire for simultaneous reception by the public and at the request of a user (interactive cable service).
The 1986 amendment was intended to accommodate the inherent characteristics of databases (digitalized information retrieved with the aid of a computer), and services developed for databases (on-line database services). However it has since become clear that these amendments were not sufficient to cover not only these factors but also newly emerging issues.
2. New Issues Although only 8 years have passed since the 1986 amendment, the structure of databases and the database industry has changed rapidly and new issues have emerged accordingly.
The following three issues are the most important. First is the change in the type of content of databases. Databases can be classified as reference databases or fact databases, and the percentage of fact databases has increased from 58.5% to 71.8% during 1986 to 1991.
1 This trend is expected to continue. Thus the protection of fact databases has become important.
The second issue arises from the development of multi-media works. Presently there is no precise definition of a multi-media work. The following characteristics are often referred to when explaining multi-media; multi-media is a media in which various kinds of information such as text, sound, still images and audio visuals are stored in a digitalized form, and the user can interactively select, process and use the information in a multi-media work. Presently multi-media works are being incorporated into databases and sometimes multi-media works are regarded as databases themselves. How to deal with multi-media work in respect of copyright is a difficult problem. Also, the fact that authors or producers of multi-media work are usually newcomers to copyright issues makes the situation that much more complex.
The third issue is the development of automatic database creating systems. A Point of Sales system is an example of an automatic data obtaining system. Even key words can be extracted automatically. Automatic creation of databases makes it difficult to decide who is the author of the database, and who is to be rewarded for the creation of the database.
3. Protection of Factual Databases The intellectual creation of a database lies in the selection or systematic construction of information contained therein. Copyright infringement does not occur unless the selection or systematic construction of information is copied. Non-copyrightable factual information will not become copyrightable simply because it is contained in a database. Thus, there are no restrictions upon subsequent compilers in using factual data contained in databases as far as copyright is concerned.
Corresponding to the increasing number and importance of factual databases, the rightholders of databases began to want their costs and efforts involved in constructing databases to be protected.
One proposal is to protect digitalized factual data by means of a digitalization right as one of the neighbouring rights to copyright. A digitalization right is a right owned by the person who first digitalized the information, like the producer of a phonogram who first fixes the sounds in phonogram. Subsequent compilers who want to use such digitalized information in a digitalized form must obtain authorization from the person who first digitalized the information. However, there are objections to legalizing such a neighbouring right, because the creative activities involved in the digitalizing process fall short of the level of intellectual creativity required to attract neighboring right protection.
There is a limited possibility that the cost and effort of database producers can be protected under the Unfair Competition Prevention Law. An example of this kind of activity is when the content of the database itself is so famous that it is a clear indication of the producer of the database and a subsequent competitor uses the contents to present his database in such a way that it creates confusion with the original producer. Under such circumstances the producer of the original database can demand injunctive relief and claim compensation for the damages.
2 The Intellectual Property Policy Committee of the Industrial Structure Council studied this issue when it considered amending the Unfair Competition Prevention Law. The committee published its report last year. It concluded that much study was needed to decide how to protect databases from parasitic behavior by competitors and made no recommendation to amend the Unfair Competition Prevention Law for the protection of databases.
3 Following that conclusion no special reference was made for the protection of databases in the 1993 amendment of the Unfair Competition Prevention Law.
4. Multi-media works How to protect multi-media work in copyright law is a difficult issue due to the nature of multi-media work as digitalized information.
Digitalized information has the following characteristics.
4 (1) Works are essentially equivalent; text, video, or music are all reduced to a series of bits and stored in the same way;
(2) Works are easily copied;
(3) Works are easy to manipulate and modify; and
(4) Works are easily transmitted to other users or easily accessed by multiple users.
The first issue is that multi-media consists of many kinds of works and the volume of data contained in a work is huge. A typical multi-media work consists of text, sound, still images or moving images, and the producer of a multi-media work has to obtain authorization from the rightholder of each pre-existing work. Since the traditional licen[s]ing norms of each pre-existing work are not constructed with multi-media work in mind, the producers of multi-media work often feel the licen[s]ing conditions of each work, such as the royalty and fee schemes, are inhibiting the development of multi-media works. On the other hand, the rightholders of traditional works feel uneasy when contracting with multi-media producers because it is not clear how their works will be used in the multi-media work. These two factors are not good for the development of multi-media works, and the need to establish a new licensing norm for multi-media work has been requested by both sides.
The Multi-Media Subcommittee of the Copyright Council published its first report last year.
5 In that report it proposed to create a Center of Copyright Information (CCI). CCI is designed to collect and distribute all copyright information needed for the creation of multi-media works. CCI is expected to facilitate the smooth and easy creation of multi-media works. According to this report the creation of a collective administration system to deal with the various kinds of work was thought to be difficult because of the current differences between the administration systems for each type of work. Rather it recommended to develop a collective administration system for each kind of work and then negotiate within these administrations as to how to coordinate their activities.
A second issue is that multi-media works are easily copied, manipulated, and modified without a trace of the original work, and are easily transmitted to and accessed by multiple users.
According to such characteristics, temporary storage of a multi-media work in the memory of a user’s computer along with the use of it should be regarded as a reproduction of the work, as is the case with computer programs according to the EC directive on the legal protection of computer programs.
6 Because storage of a multi-media work in parts of the memory of a user’s computer is the first step for all subsequent use by the user, it is important for the rightholder to have powers to protect the work efficiently against unlawful users.
Though temporary storage of a multi-media work in parts of the memory of a user’s computer along with the use of the multi-media work is regarded as a reproduction of the work, it is difficult for the rightholder to exercise this right in practice.
One proposal is when the author of a multi-media work puts his or her work into circulation, for example putting the multi-media work in the contents of an on-line database, he or she is deemed not to use his or her reproduction right as an exclusive right, but rather use it as a right of remuneration. Thus subsequent users do not need to get authorization when they use the multi-media work, but the users have to pay a charge for each use.
Superdistribution is a system designed to manage such rights for multi-media works.
7 Under a superdistribution system each work has an electronic label. The label, like a bar-code, contains the conditions of use or other information relevant to the multi-media work (charge for each use, etc.). When a user uses a multi-media work, the electronic label of the multi-media work is read and recorded automatically with the aid of a Software Usage Monitor in the user’s computer. The record of the use is then transferred to the main computer of a collecting organization, and a charge for each use would be collected and distributed to the rightholder.
However, if the superdistribution system is accepted as a system to administer an author’s rights in respect of multi-media work, it will take some time until such a system is realized in practice.
For the time being, the contract between rightholders and users is the most practical way to protect the copyright of a multi-media work.
It is important to create a system such as CCI as proposed in the report of the Subcommittee of the Copyright Council for the development of multi-media works. It is also important to regard temporary storage of multi-media work in the memory of a user’s computer as a reproduction of the work in accordance with the characteristics of a multi-media work and to further protect a multi-media work from unauthorized users.
6. Automatic database creation With the development of automatic database creating systems, it is difficult to decide who is the author or authors of the database. The reason for that difficulty is not because there is no-one involved in the creation of the database. Rather there are many people who contribute to the creation of the database, but the individual activity of each contributor falls short of the creativity required to attract copyright protection at first glance.
For example, there are many people who contribute to the creation of databases created by Point of Sales systems; the designer of the total system of the database, the computer programmer who created the computer program for the system, the person who inpu[t]ted and transmitted the information at the register, the person who received and stored the information, etc.
The Ninth Subcommittee of the Copyright Council considered this issue in its study of works created with the aid of a computer, and last year published its report.
8 The report found that the intellectual element of a database lies in selecting the information, setting up the system of the database and analyzing and processing the information. This is in accordance with the definition of a database in the Copyright Law. However, the Subcommittee found among those elements the setting up of the database system was the most important.
It concluded that the author of a database made by a Point of Sales system was the person who prepared the systematic construction of that database. Systematic construction was defined to be the standard of selection of information, the format of the database, etc. Thus, the person who inputs and transmits the information to a main computer or the person who receives and stores the information is not the author of the database.
7. Other issues There are many other issues which should be examined when discussing the protection of databases.
One important issue is how to protect the database distributors. Presently there is no protection for database distributors under copyright law. But in response to the importance of the activity of database distributors a proposal has been made to protect the database distributor by a neighboring right similar to broadcast organizations or organizations of cable program services.
8. Conclusion With the rapid development of the Japanese database industry many issues have arisen in relation to the protection of databases. Presently the resolution of those issues still remains somewhat vague, especially in respect of multi-media protection. However copyright has been dealing with developments in the technology, and should be able to cope with any new issues arising from technological development in an information age. The copyright system does not need to be, and should not be, overwhelmed by the development of technology. Rather the copyright system can be, and should be, designed as a technology friendly system, along with protecting creative activities effectively.
The Japanese experience is one example of how copyright law is tackling these issues.
Footnotes — Appendix 4A[43]:
1 “Database Hakusho” p.27-31, Database Promotion Center (Japan), 1993.5.
Full-text databases are included in the category of fact databases in this report. But as far as the copyright of the author of the database’s concerned, protection of full-text databases has the same problems as numerical databases, that is the limitation in the selection of the contents of the database. As the number of contents of the database increases, the room for creativity in the selection of the contents decreases. When a subsequent competitor uses the entire contents of a full-text database and changes the systematic construction of it to make a different database, there is no infringement as far as copyright is concerned.
2 In the case of
Morisawa v.
Yamauti, the plaintiff alleged that the defendant was producing and selling a floppy disk which contained the same typographic design for a word processor as the plaintiff’s, and brought an action for an injunction restraining the defendant from continuing to produc[e] and to sell the floppy disk under the Unfair Competition Prevention Law. The Tokyo High Court ruled that the typographic design contained in the plaintiff’s floppy disk was so famous that it was a clear indication of the plaintiff’s design and the typographic design of the defendant was so similar that it created confusion with the plaintiff’s. The Tokyo High Court ruled for the plaintiff. (Decision of Tokyo High Court, 12.24.1993)
3 The Interim Report of the Intellectual Property Policy Committee of the Industrial Structure Council on the Review of the Unfair Competition Prevention Law (12.14.1992), Chapter 1—4. This report is listed in the Appendix of “Tikujoukaisetu Fuseikyousoubousihou (Commentary on the Unfair Competition Prevention Law)”, Office of Intellectual Property Policy, MITI (1994).
4 See, U.S. Congress, O.T.A., Finding a Balance: Computer Software, Intellectual Property, and the Challenge of Technological Change, p.170, (1992).
5 See, The first report of the Multi-media Subcommittee of the Copyright Council, Bunkachou (1993).
6 The temporary reproduction of a computer program in the memory of a computer during the operation of the program is included as one of the restricted acts in the Council Directive of 14 May 1991 on the legal protection of computer programs. See, Article 4 of the Directie. OJ No. L 112, 17/5/91, p.44.
The storing of contents of a phonogram, even temporarily, in electronic form is included as one of the restricted acts in the Memorandum prepared by the International Bureau of WIPO for the COMMITTEE OF EXPERTS ON A POSSIBLE INSTRUMENT ON THE PROTECTION OF THE RIGHTS OF PERFORMERS AND PRODUCERS OF PHONOGRAMS (Geneve, June 28 to July 2, 1993), p.10,18, INR/CE/I/2 (3.12.1993).
7 The Superdistribution system was invented by Professor Mori in 1983. See, Ryoiti Mori, Masaji Kawahara: “Superdistribution: The Concept and the Architecture”, The Trans.of IEICE, Vol.E73.No.7.pp.1133-1146(1990). See also, Ryoiti Mori: “On Superdistribution”, BYTE, Vol.15. No.9. p.344 (1990).
8 See, The report of the Ninth Subcommittee of the Copyright Council (Works created with the aid of a computer), Bunkachov (1993)
FILLING OUT APPLICATION FORM CA
(a) General. This section prescribes the procedures for submission of legal documents pertaining to computer shareware and the deposit of public domain computer software under Section 805 of Public Law 101-650, 104 Stat. 5089 (1990). Documents recorded in the Copyright Office under this regulation will be included in the Computer Shareware Registry. Recordation in this registry willestablish a public record of licenses or other legal documents governing the relationship between copyrighr owners of computer shareware and persons associated with the dissemination or other use of computer shareware. Documents transferring the ownership of some or all rights under the copyright law of computer shareware and security interests in such software should be recorded under
17 U.S.C. § 205, as implemented by Section 201.4.
(b) Definitions.
(1) The term computer shareware is accorded its customary meaning within the software industry. In general, shareware is copyrighted software which is distributed for the purposes of testing and review, subject to the condition that payment to the copyright owner is required after a person who has secured a copy decided to use the software.
(2) A document designated as pertaining to computer shareware means licenses or other legal documents governing the relationship between copyright owners of computer shareware and persons associated with the dissemination or other use of computer shareware.
(3) Public domain computer software means software which has been publicly distributed with an explicit disclaimer of copyright protection by the copyright owner.
(c) Forms. The Copyright Office does not provide forms for the use of persons recording documents designated as pertaining to computer shareware or for the deposit of public domain software.
(d) Recordable Documents.
(1) Any document clearly designated as a “Document Pertaining to Computer Shareware” and which governs the legal relationship between owners of computer shareware and persons associated with the dissemination or other use of computer shareware may be recorded in the Computer Shareware Registry.
(2) Submitted documents may be a duplicate original, a legible photocopy, or other legible facsimile reproduction of the document, and must be complete on its face.
(3) Submitted documents will not be returned, and the Copyright Office requests that if the document is considered valuable, that only copies of that document be submitted for recordation.
(4) The Copyright Office encourages the submission of a machine-readable copy of the document in the form of an IMB-PC compatible disc, in addition to a copy of the document itself.
(e) Fee. For a document covering no more than one title, the basic recordibg fee is $20. An additional charge of $10 is made for each group of not more than 10 titles. For these purposes, the term “title” refers to each computer shareware program covered by the document.
(f) Date of recordation. The date of recordation is the date when all of the elements required for recordation, including the prescribed fee have been received in the Copyright Office. After recordation of the statement, the sender will receive a certificate of record from the Copyright Office. The submission will be retained and filed by the Copyright Office, and may be destroyed at a later date after preparing suitable copies, in accordance w2ith usual procedures.
(g) Donation of public domain computer software.
(1) Any person may donate a copy of public domain computer software for the benefit of the Machine-Readable Collections Reading Room of the Library of Congress. The decision as to whether any public domain computer software is suitable for accession to the collections rests solely with the Library of Congress. Materials not selected will be disposed of in accordance with usual procedures, including transfer to other libraries, sale or destruction. Donation of public domain software may be made regardless of whether a document has been recorded pertaining to the software.
(2) In order to donate public domain software, the following conditions must be met:
(i) the copy of the public domain software must contain an explicit disclaimer of copyright protection from the copyright owner;
(ii) the submission should contain documentation regarding the software. If the documentation is in machine-readable form, a print-out of the documentation should be included in the donation;
(iii) if the public domain software is marketed in a box or other packaging, the entire work as distributed, including the packaging, should be deposited;
(iv) if the public domain software is copy protected, two copies of the software must be submitted.
(3) Donations of public domain software with an accompanying letter of explanation must be sent to the following address: Gift Section, Exchange $ Gift Division, Library of Congress, Washington, D.C. 20540.
THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty establishing the European Community, and in particular Article 57 (2), 66 and 100a thereof,
Having regard to the proposal from the Commission (1),
Having regard to the opinion of the Economic and Social Committee (2),
Acting in accordance with the procedure laid down in Article 189b of the Treaty (3),
(1) Whereas databases are at present not sufficiently protected in all Member States by existing legislation; whereas such protection, where it exists, has different attributes;
(2) Whereas such differences in the legal protection of databases offered by the legislation of the Member States have direct negative effects on the functioning of the internal market as regards databases and in particular on the freedom of natural and legal persons to provide on-line database goods and services on the basis of harmonized legal arrangements throughout the Community; whereas such differences could well become more pronounced as Member States introduce new legislation in this field, which is now taking on an increasingly international dimension;
(3) Whereas existing differences distorting the functioning of the internal market need to be removed and new ones prevented from arising, while differences not adversely affecting the functioning of the internal market or the development of an information market within the Community need not be removed or prevented from arising;
(4) Whereas copyright protection for databases exists in varying forms in the Member States according to legislation or case-law, and whereas, if differences in legislation in the scope and conditions of protection remain between the Member States, such unharmonized intellectual property rights can have the effect of preventing the free movement of goods or services within the Community;
(5) Whereas copyright remains an appropriate form of exclusive right for authors who have created databases;
(6) Whereas, nevertheless, in the absence of a harmonized system of unfair-competition legislation or of case-law, other measures are required in addition to prevent the unauthorized extraction and/or re-utilization of the contents of a database;
(7) Whereas the making of databases requires the investment of considerable human, technical and financial resources while such databases can be copied or accessed at a fraction of the cost needed to design them independently;
(8) Whereas the unauthorized extraction and/or re-utilization of the contents of a database constitute acts which can have serious economic and technical consequences;
(9) Whereas databases are a vital tool in the development of an information market within the Community; whereas this tool will also be of use in many other fields;
(10) Whereas the exponential growth, in the Community and worldwide, in the amount of information generated and processed annually in all sectors of commerce and industry calls for investment in all the Member States in advanced information processing systems;
(11) Whereas there is at present a very great imbalance in the level of investment in the database sector both as between the Member States and between the Community and the world’s largest database-producing third countries;
(12) Whereas such an investment in modern information storage and processing systems will not take place within the Community unless a stable and uniform legal protection regime is introduced for the protection of the rights of makers of databases;
(13) Whereas this Directive protects collections, sometimes called ‘compilations‘, of works, data or other materials which are arranged, stored and accessed by means which include electronic, electromagnetic or electro-optical processes or analogous processes;
(14) Whereas protection under this Directive should be extended to cover non-electronic databases;
(15) Whereas the criteria used to determine whether a database should be protected by copyright should be defined to the fact that the selection or the arrangement of the contents of the database is the author’s own intellectual creation; whereas such protection should cover the structure of the database;
(16) Whereas no criterion other than originality in the sense of the author’s intellectual creation should be applied to determine the eligibility of the database for copyright protection, and in particular no aesthetic or qualitative criteria should be applied;
(17) Whereas the term ‘database‘ should be understood to include literary, artistic, musical or other collections of works or collections of other material such as texts, sound, images, numbers, facts, and data; whereas it should cover collections of independent works, data or other materials which are systematically or methodically arranged and can be individually accessed; whereas this means that a recording or an audiovisual, cinematographic, literary or musical work as such does not fall within the scope of this Directive;
(18) Whereas this Directive is without prejudice to the freedom of authors to decide whether, or in what manner, they will allow their works to be included in a database, in particular whether or not the authorization given is exclusive; whereas the protection of databases by the sui generis right is without prejudice to existing rights over their contents, and whereas in particular where an author or the holder of a related right permits some of his works or subject matter to be included in a database pursuant to a non-exclusive agreement, a third party may make use of those works or subject matter subject to the required consent of the author or of the holder of the related right without the sui generis right of the maker of the database being invoked to prevent him doing so, on condition that those works or subject matter are neither extracted from the database nor re-utilized on the basis thereof;
(19) Whereas, as a rule, the compilation of several recordings of musical performances on a CD does not come within the scope of this Directive, both because, as a compilation, it does not meet the conditions for copyright protection and because it does not represent a substantial enough investment to be eligible under the sui generis right;
(20) Whereas protection under this Directive may also apply to the materials necessary for the operation or consultation of certain databases such as thesaurus and indexation systems;
(21) Whereas the protection provided for in this Directive relates to databases in which works, data or other materials have been arranged systematically or methodically; whereas it is not necessary for those materials to have been physically stored in an organized manner;
(22) Whereas electronic databases within the meaning of this Directive may also include devices such as CD-ROM and CD-i;
(23) Whereas the term ‘database‘ should not be taken to extend to computer programs used in the making or operation of a database, which are protected by Council Directive 91/250/EEC of 14 May 1991 on the legal protection of computer programs (4);
(24) Whereas the rental and lending of databases in the field of copyright and related rights are governed exclusively by Council Directive 92/100/EEC of 19 November 1992 on rental right and lending right and on certain rights related to copyright in the field of intellectual property (5);
(25) Whereas the term of copyright is already governed by Council Directive 93/98/EEC of 29 October 1993 harmonizing the term of protection of copyright and certain related rights (6);
(26) Whereas works protected by copyright and subject matter protected by related rights, which are incorporated into a database, remain nevertheless protected by the respective exclusive rights and may not be incorporated into, or extracted from, the database without the permission of the rightholder or his successors in title;
(27) Whereas copyright in such works and related rights in subject matter thus incorporated into a database are in no way affected by the existence of a separate right in the selection or arrangement of these works and subject matter in a database;
(28) Whereas the moral rights of the natural person who created the database belong to the author and should be exercised according to the legislation of the Member States and the provisions of the Berne Convention for the Protection of Literary and Artistic Works; whereas such moral rights remain outside the scope of this Directive;
(29) Whereas the arrangements applicable to databases created by employees are left to the discretion of the Member States; whereas, therefore nothing in this Directive prevents Member States from stipulating in their legislation that where a database is created by an employee in the execution of his duties or following the instructions given by his employer, the employer exclusively shall be entitled to exercise all economic rights in the database so created, unless otherwise provided by contract;
(30) Whereas the author’s exclusive rights should include the right to determine the way in which his work is exploited and by whom, and in particular to control the distribution of his work to unauthorized persons;
(31) Whereas the copyright protection of databases includes making databases available by means other than the distribution of copies;
(32) Whereas Member States are required to ensure that their national provisions are at least materially equivalent in the case of such acts subject to restrictions as are provided for by this Directive;
(33) Whereas the question of exhaustion of the right of distribution does not arise in the case of on-line databases, which come within the field of provision of services; whereas this also applies with regard to a material copy of such a database made by the user of such a service with the consent of the rightholder; whereas, unlike CD-ROM or CD-i, where the intellectual property is incorporated in a material medium, namely an item of goods, every on-line service is in fact an act which will have to be subject to authorization where the copyright so provides;
(34) Whereas, nevertheless, once the rightholder has chosen to make available a copy of the database to a user, whether by an on-line service or by other means of distribution, that lawful user must be able to access and use the database for the purposes and in the way set out in the agreement with the rightholder, even if such access and use necessitate performance of otherwise restricted acts;
(35) Whereas a list should be drawn up of exceptions to restricted acts, taking into account the fact that copyright as covered by this Directive applies only to the selection or arrangements of the contents of a database; whereas Member States should be given the option of providing for such exceptions in certain cases; whereas, however, this option should be exercised in accordance with the Berne Convention and to the extent that the exceptions relate to the structure of the database; whereas a distinction should be drawn between exceptions for private use and exceptions for reproduction for private purposes, which concerns provisions under national legislation of some Member States on levies on blank media or recording equipment;
(36) Whereas the term ‘scientific research‘ within the meaning of this Directive covers both the natural sciences and the human sciences;
(37) Whereas Article 10 (1) of the Berne Convention is not affected by this Directive;
(38) Whereas the increasing use of digital recording technology exposes the database maker to the risk that the contents of his database may be copied and rearranged electronically, without his authorization, to produce a database of identical content which, however, does not infringe any copyright in the arrangement of his database;
(39) Whereas, in addition to aiming to protect the copyright in the original selection or arrangement of the contents of a database, this Directive seeks to safeguard the position of makers of databases against misappropriation of the results of the financial and professional investment made in obtaining and collection the contents by protecting the whole or substantial parts of a database against certain acts by a user or competitor;
(40) Whereas the object of this sui generis right is to ensure protection of any investment in obtaining, verifying or presenting the contents of a database for the limited duration of the right; whereas such investment may consist in the deployment of financial resources and/or the expending of time, effort and energy;
(41) Whereas the objective of the sui generis right is to give the maker of a database the option of preventing the unauthorized extraction and/or re-utilization of all or a substantial part of the contents of that database; whereas the maker of a database is the person who takes the initiative and the risk of investing; whereas this excludes subcontractors in particular from the definition of maker;
(42) Whereas the special right to prevent unauthorized extraction and/or re-utilization relates to acts by the user which go beyond his legitimate rights and thereby harm the investment; whereas the right to prohibit extraction and/or re-utilization of all or a substantial part of the contents relates not only to the manufacture of a parasitical competing product but also to any user who, through his acts, causes significant detriment, evaluated qualitatively or quantitatively, to the investment;
(43) Whereas, in the case of on-line transmission, the right to prohibit re-utilization is not exhausted either as regards the database or as regards a material copy of the database or of part thereof made by the addressee of the transmission with the consent of the rightholder;
(44) Whereas, when on-screen display of the contents of a database necessitates the permanent or temporary transfer of all or a substantial part of such contents to another medium, that act should be subject to authorization by the rightholder;
(45) Whereas the right to prevent unauthorized extraction and/or re-utilization does not in any way constitute an extension of copyright protection to mere facts or data;
(46) Whereas the existence of a right to prevent the unauthorized extraction and/or re-utilization of the whole or a substantial part of works, data or materials from a database should not give rise to the creation of a new right in the works, data or materials themselves;
(47) Whereas, in the interests of competition between suppliers of information products and services, protection by the sui generis right must not be afforded in such a way as to facilitate abuses of a dominant position, in particular as regards the creation and distribution of new products and services which have an intellectual, documentary, technical, economic or commercial added value; whereas, therefore, the provisions of this Directive are without prejudice to the application of Community or national competition rules;
(48) Whereas the objective of this Directive, which is to afford an appropriate and uniform level of protection of databases as a means to secure the remuneration of the maker of the database, is different from the aim of Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data (7), which is to guarantee free circulation of personal data on the basis of harmonized rules designed to protect fundamental rights, notably the right to privacy which is recognized in Article 8 of the European Convention for the Protection of Human Rights and Fundamental Freedoms; whereas the provisions of this Directive are without prejudice to data protection legislation;
(49) Whereas, notwithstanding the right to prevent extraction and/or re-utilization of all or a substantial part of a database, it should be laid down that the maker of a database or rightholder may not prevent a lawful user of the database from extracting and re-utilizing insubstantial parts; whereas, however, that user may not unreasonably prejudice either the legitimate interests of the holder of the sui generis right or the holder of copyright or a related right in respect of the works or subject matter contained in the database;
(50) Whereas the Member States should be given the option of providing for exceptions to the right to prevent the unauthorized extraction and/or re-utilization of a substantial part of the contents of a database in the case of extraction for private purposes, for the purposes of illustration for teaching or scientific research, or where extraction and/or re-utilization are/is carried out in the interests of public security or for the purposes of an administrative or judicial procedure; whereas such operations must not prejudice the exclusive rights of the maker to exploit the database and their purpose must not be commercial;
(51) Whereas the Member States, where they avail themselves of the option to permit a lawful user of a database to extract a substantial part of the contents for the purposes of illustration for teaching or scientific research, may limit that permission to certain categories of teaching or scientific research institution;
(52) Whereas those Member States which have specific rules providing for a right comparable to the sui generis right provided for in this Directive should be permitted to retain, as far as the new right is concerned, the exceptions traditionally specified by such rules;
(53) Whereas the burden of proof regarding the date of completion of the making of a database lies with the maker of the database;
(54) Whereas the burden of proof that the criteria exist for concluding that a substantial modification of the contents of a database is to be regarded as a substantial new investment lies with the maker of the database resulting from such investment;
(55) Whereas a substantial new investment involving a new term of protection may include a substantial verification of the contents of the database;
(56) Whereas the right to prevent unauthorized extraction and/or re-utilization in respect of a database should apply to databases whose makers are nationals or habitual residents of third countries or to those produced by legal persons not established in a Member State, within the meaning of the Treaty, only if such third countries offer comparable protection to databases produced by nationals of a Member State or persons who have their habitual residence in the territory of the Community;
(57) Whereas, in addition to remedies provided under the legislation of the Member States for infringements of copyright or other rights, Member States should provide for appropriate remedies against unauthorized extraction and/or re-utilization of the contents of a database;
(58) Whereas, in addition to the protection given under this Directive to the structure of the database by copyright, and to its contents against unauthorized extraction and/or re-utilization under the sui generis right, other legal provisions in the Member States relevant to the supply of database goods and services continue to apply;
(59) Whereas this Directive is without prejudice to the application to databases composed of audiovisual works of any rules recognized by a Member State’s legislation concerning the broadcasting of audiovisual programmes;
(60) Whereas some Member States currently protect under copyright arrangements databases which do not meet the criteria for eligibility for copyright protection laid down in this Directive; whereas, even if the databases concerned are eligible for protection under the right laid down in this Directive to prevent unauthorized extraction and/or re-utilization of their contents, the term of protection under that right is considerably shorter than that which they enjoy under the national arrangements currently in force; whereas harmonization of the criteria for determining whether a database is to be protected by copyright may not have the effect of reducing the term of protection currently enjoyed by the rightholders concerned; whereas a derogation should be laid down to that effect; whereas the effects of such derogation must be confined to the territories of the Member States concerned,
HAVE ADOPTED THIS DIRECTIVE:
Article 1 Scope
- This Directive concerns the legal protection of databases in any form.
- For the purposes of this Directive, ‘database‘ shall mean a collection of independent works, data or other materials arranged in a systematic or methodical way and individually accessible by electronic or other means.
- Protection under this Directive shall not apply to computer programs used in the making or operation of databases accessible by electronic means.
Article 2 Limitations of the scope
This Directive shall apply without prejudice to Community provisions relating to:
(a) the legal protection of computer programs;
(b) rental right, lending right and certain rights related to copyright in the field of intellectual property;
(c) the term of protection of copyright and certain related rights.
Article 3 Object of protection
- In accordance with this Directive, databases which, by reason of the selection or arrangement of their contents, constitute the author’s own intellectual creation shall be protected as such by copyright. No other criteria shall be applied to determine their eligibility for that protection.
- The copyright protection of databases provided for by this Directive shall not extend to their contents and shall be without prejudice to any rights subsisting in those contents themselves.
Article 4 Database authorship
- The author of a database shall be the natural person or group of natural persons who created the base or, where the legislation of the Member States so permits, the legal person designated as the rightholder by that legislation.
- Where collective works are recognized by the legislation of a Member State, the economic rights shall be owned by the person holding the copyright.
- In respect of a database created by a group of natural persons jointly, the exclusive rights shall be owned jointly.
Article 5 Restricted acts
In respect of the expression of the database which is protectable by copyright, the author of a database shall have the exclusive right to carry out or to authorize:
(a) temporary or permanent reproduction by any means and in any form, in whole or in part;
(b) translation, adaptation, arrangement and any other alteration;
(c) any form of distribution to the public of the database or of copies thereof. The first sale in the Community of a copy of the database by the rightholder or with his consent shall exhaust the right to control resale of that copy within the Community;
(d) any communication, display or performance to the public;
(e) any reproduction, distribution, communication, display or performance to the public of the results of the acts referred to in (b).
Article 6 Exceptions to restricted acts
- The performance by the lawful user of a database or of a copy thereof of any of the acts listed in Article 5 which is necessary for the purposes of access to the contents of the databases and normal use of the contents by the lawful user shall not require the authorization of the author of the database. Where the lawful user is authorized to use only part of the database, this provision shall apply only to that part.
- Member States shall have the option of providing for limitations on the rights set out in Article 5 in the following cases:
(a) in the case of reproduction for private purposes of a non-electronic database;
(b) where there is use for the sole purpose of illustration for teaching or scientific research, as long as the source is indicated and to the extent justified by the non-commercial purpose to be achieved;
(c) where there is use for the purposes of public security of for the purposes of an administrative or judicial procedure;
(d) where other exceptions to copyright which are traditionally authorized under national law are involved, without prejudice to points (a), (b) and (c).
- In accordance with the Berne Convention for the protection of Literary and Artistic Works, this Article may not be interpreted in such a way as to allow its application to be used in a manner which unreasonably prejudices the rightholder’s legitimate interests or conflicts with normal exploitation of the database.
Article 7 Object of protection
- Member States shall provide for a right for the maker of a database which shows that there has been qualitatively and/or quantitatively a substantial investment in either the obtaining, verification or presentation of the contents to prevent extraction and/or re-utilization of the whole or of a substantial part, evaluated qualitatively and/or quantitatively, of the contents of that database.
- For the purposes of this Chapter:
(a) ‘extraction’ shall mean the permanent or temporary transfer of all or a substantial part of the contents of a database to another medium by any means or in any form;
(b) ‘re-utilization’ shall mean any form of making available to the public all or a substantial part of the contents of a database by the distribution of copies, by renting, by on-line or other forms of transmission. The first sale of a copy of a database within the Community by the rightholder or with his consent shall exhaust the right to control resale of that copy within the Community;
Public lending is not an act of extraction or re-utilization.
- The right referred to in paragraph 1 may be transferred, assigned or granted under contractual licence.
- The right provided for in paragraph 1 shall apply irrespective of the eligibility of that database for protection by copyright or by other rights. Moreover, it shall apply irrespective of eligibility of the contents of that database for protection by copyright or by other rights. Protection of databases under the right provided for in paragraph 1 shall be without prejudice to rights existing in respect of their contents.
- The repeated and systematic extraction and/or re-utilization of insubstantial parts of the contents of the database implying acts which conflict with a normal exploitation of that database or which unreasonably prejudice the legitimate interests of the maker of the database shall not be permitted.
Article 8 Rights and obligations of lawful users
- The maker of a database which is made available to the public in whatever manner may not prevent a lawful user of the database from extracting and/or re-utilizing insubstantial parts of its contents, evaluated qualitatively and/or quantitatively, for any purposes whatsoever. Where the lawful user is authorized to extract and/or re-utilize only part of the database, this paragraph shall apply only to that part.
- A lawful user of a database which is made available to the public in whatever manner may not perform acts which conflict with normal exploitation of the database or unreasonably prejudice the legitimate interests of the maker of the database.
- A lawful user of a database which is made available to the public in any manner may not cause prejudice to the holder of a copyright or related right in respect of the works or subject matter contained in the database.
Article 9 Exceptions to the sui generis right
Member States may stipulate that lawful users of a database which is made available to the public in whatever manner may, without the authorization of its maker, extract or re-utilize a substantial part of its contents:
(a) in the case of extraction for private purposes of the contents of a non-electronic database;
(b) in the case of extraction for the purposes of illustration for teaching or scientific research, as long as the source is indicated and to the extent justified by the non-commercial purpose to be achieved;
(c) in the case of extraction and/or re-utilization for the purposes of public security or an administrative or judicial procedure.
Article 10 Term of protection
- The right provided for in Article 7 shall run from the date of completion of the making of the database. It shall expire fifteen years from the first of January of the year following the date of completion.
- In the case of a database which is made available to the public in whatever manner before expiry of the period provided for in paragraph 1, the term of protection by that right shall expire fifteen years from the first of January of the year following the date when the database was first made available to the public.
- Any substantial change, evaluated qualitatively or quantitatively, to the contents of a database, including any substantial change resulting from the accumulation of successive additions, deletions or alterations, which would result in the database being considered to be a substantial new investment, evaluated qualitatively or quantitatively, shall qualify the database resulting from that investment for its own term of protection.
Article 11 Beneficiaries of protection under the sui generis right
- The right provided for in Article 7 shall apply to database whose makers or rightholders are nationals of a Member State or who have their habitual residence in the territory of the Community.
- Paragraph 1 shall also apply to companies and firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Community; however, where such a company or firm has only its registered office in the territory of the Community, its operations must be genuinely linked on an ongoing basis with the economy of a Member State.
- Agreements extending the right provided for in Article 7 to databases made in third countries and falling outside the provisions of paragraphs 1 and 2 shall be concluded by the Council acting on a proposal from the Commission. The term of any protection extended to databases by virtue of that procedure shall not exceed that available pursuant to Article 10.
Article 12 Remedies
Member States shall provide appropriate remedies in respect of infringements of the rights provided for in this Directive.
Article 13 Continued application of other legal provisions
This Directive shall be without prejudice to provisions concerning in particular copyright, rights related to copyright or any other rights or obligations subsisting in the data, works or other materials incorporated into a database, patent rights, trade marks, design rights, the protection of national treasures, laws on restrictive practices and unfair competition, trade secrets, security, confidentiality, data protection and privacy, access to public documents, and the law of contract.
Article 14 Application over time
- Protection pursuant to this Directive as regards copyright shall also be available in respect of databases created prior to the date referred to Article 16 (1) which on that date fulfil the requirements laid down in this Directive as regards copyright protection of databases.
- Notwithstanding paragraph 1, where a database protected under copyright arrangements in a Member State on the date of publication of this Directive does not fulfil the eligibility criteria for copyright protection laid down in Article 3 (1), this Directive shall not result in any curtailing in that Member State of the remaining term of protection afforded under those arrangements.
- Protection pursuant to the provisions of this Directive as regards the right provided for in Article 7 shall also be available in respect of databases the making of which was completed not more than fifteen years prior to the date referred to in Article 16 (1) and which on that date fulfil the requirements laid down in Article 7.
- The protection provided for in paragraphs 1 and 3 shall be without prejudice to any acts concluded and rights acquired before the date referred to in those paragraphs.
- In the case of a database the making of which was completed not more than fifteen years prior to the date referred to in Article 16 (1), the term of protection by the right provided for in Article 7 shall expire fifteen years from the first of January following that date.
Article 15 Binding nature of certain provisions
Any contractual provision contrary to Articles 6 (1) and 8 shall be null and void.
Article 16 Final provisions
- Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this Directive before 1 January 1998.
When Member States adopt these provisions, they shall contain a reference to this Directive or shall be accompanied by such reference on the occasion of their official publication. The methods of making such reference shall be laid down by Member States.
- Member States shall communicate to the Commission the text of the provisions of domestic law which they adopt in the field governed by this Directive.
- Not later than at the end of the third year after the date referred to in paragraph 1, and every three years thereafter, the Commission shall submit to the European Parliament, the Council and the Economic and Social Committee a report on the application of this Directive, in which, inter alia, on the basis of specific information supplied by the Member States, it shall examine in particular the application of the sui generis right, including Articles 8 and 9, and shall verify especially whether the application of this right has led to abuse of a dominant position or other interference with free competition which would justify appropriate measures being taken, including the establishment of non-voluntary licensing arrangements. Where necessary, it shall submit proposals for adjustment of this Directive in line with developments in the area of databases.
Article 17
This Directive is addressed to the Member States.
Done at Strasbourg, 11 March 1996.
For the European Parliament
The President
K. HÄNSCHF or the Council
The President
L. DINI
(1) OJ No C 156, 23. 6. 1992, p. 4 and OJ No C 308, 15. 11. 1993, p. 1.
(2) OJ No C 19, 25. 1. 1993, p. 3.
(3) Opinion of the European Parliament of 23 June 1993 (OJ No C 194, 19. 7. 1993, p. 144), Common Position of the Council of 10 July 1995 (OJ No C 288, 30. 10. 1995, p. 14), Decision of the European Parliament of 14 December 1995 (OJ No C 17, 22 1. 1996) and Council Decision of 26 February 1996.
(4) OJ No L 122, 17. 5. 1991, p. 42. Directive as last amended by Directive 93/98/EEC (OJ No L 290, 24. 11. 1993, p. 9.)
(5) OJ No L 346, 27. 11. 1992, p. 61.
(6) OJ No L 290, 24. 11. 1993, p. 9.
(7) OJ No L 281, 23. 11. 1995, p. 31.
Table of Contents
| | Page |
| I. | Intellectual Property Bankruptcy Protection Act, Public Law 100-506................ | 1 |
| II. | Specific Section 365(n) Cases and Strategies................ | 5 |
| | A. | Avoiding Liquidated Damages and Foreign Governing Law................ | 5 |
| | B. | Section 365(n) Can Be Used By Licensors as A Collection Strategy................ | 6 |
| | C. | Section 365(n) Can Affect The Timing and Strategy For Acquiring IP Assets in a Bankruptcy Proceeding................ | 6 |
| | D. | Must Recognize That Trademark Rights are Not Covered by Section 365(n)................ | 7 |
| III. | Strategies Related to Section 365(c) of the U.S. Bankruptcy Code................ | 8 |
| | A. | TheIn re Sunterra Corp. Ruling................ | 8 |
| | B. | Managing The Non-Assumption Risk................ | 9 |
| | C | Conclusion................ | 10 |
| IV. | Source Code Escrow Agreements................ | 10 |
| | A. | General................ | 10 |
| | | 1. | Escrow Agent Selection................ | 11 |
| | | 2. | Payment of Fees................ | 11 |
| | | 3. | Code Verification................ | 12 |
| | | 4. | Deposit Updates................ | 12 |
| | | 5. | Code Release Triggering Events................ | 12 |
| | | 6. | Code Release Procedures................ | 12 |
| | B. | Supplementary Agreement................ | 12 |
| | C. | Source Code Risk................ | 13 |
| | D. | Waiver of Prohibition Against Hiring................ | 13 |
| | E. | Waiver of Prohibition Against Reverse Engineering................ | 14 |
| | F. | Section 117 Rights................ | 14 |
| V. | | Perfecting Security Interests and Assignments in Bankruptcy Proceedings................ | 14 |
| | A. | Perfecting a Security Interest in Copyrighted Material................ | 14 |
| | | 1. | Registered Copyrights................ | 14 |
| | | 2. | Unregistered Copyrights................ | 15 |
| | | 3. | Scope of Perfected Security Interest in Registered Copyrights................ | 15 |
| | | 4. | Third Party Software Modifications Not Covered By Security Interest................ | 16 |
| | B | Perfection of Security Interests in Issued Patents................ | 17 |
| VI. | Assignment of Intellectual Property Assets in Bankruptcy................ | 18 |
| | A. | General................ | 18 |
| | B. | Patent Licenses................ | 18 |
| | C. | Copyright Licenses................ | 18 |
| | D. | Trademark Licenses................ | 18 |
| VII. | Automatic Stay................ | 19 |
| VIII. | Invalidity of Termination-Upon-Bankruptcy Clauses................ | 19 |
| IX. | Conclusion................ | 20 |
There are many issues that arise in connection with drafting, negotiating and enforcing license terms and conditions respecting bankruptcy and related source code escrow provisions. This paper focuses on
Section 365(n) of the U.S. Bankruptcy Code and several other sections of the U.S. Bankruptcy Code that most affect information technology transactions, source code escrow agreements and strategies, and issues relating to the perfection of security interests in intellectual property and information technology under U.S. law.
First, we will discuss
Section 365(n) of the U.S. Bankruptcy Code and a number of strategies that have arisen in connection with Section 365(n). Then, we will discuss specific concerns arising in connection with Section 365(c) and the automatic stay provisions under the U.S. Bankruptcy laws. Next, we will discuss source code escrow agreements and strategies related to licensees obtaining access to source code. Last, we will discuss the perfection of security interests in information technology intellectual property assets and the assignment of intellectual property assets in bankruptcy.
I.
Intellectual Property Bankruptcy Protection Act, Public Law 100-506 The Intellectual Property Bankruptcy Protection Act was enacted October 18, 1988. It represents a significant development affecting software licensors and licensees, and other intellectual property licensors and licensees. IT/IP legal practitioners must have a thorough understanding of these Intellectual Property Bankruptcy Protection Act amendments to the U.S. Bankruptcy Code.
The Intellectual Property Bankruptcy Protection Act added a new subsection “n” to
Section 365 of the U.S. Bankruptcy Code and also added several new definitions to Section 101. See
11 U.S.C. §§ 101,
365(n) (Supp. 1989). This legislation, in effect, overturned the Fourth Circuit’s ruling in
Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985) cert. denied,
475 U.S. 1057, 106 S. Ct. 1285, 89 L. Ed. 2d 592 (1986), whereby a debtor licensor had rejected a non-exclusive licensee’s license agreement with catastrophic consequences.
1 Under U.S. Bankruptcy law debtor licensors may reject a license in their bankruptcy proceeding on the grounds that meeting their obligations under the license agreement constitutes too great a burden on the bankruptcy estate. A debtor’s right to assume or reject an executory contract is vital to the basic purpose of a Chapter 11 reorganization under the Bankruptcy Act.
2 Under
Section 365 of the U.S. Bankruptcy Code, a debtor licensor has the right to reject “executory contracts”. The Section 365 power to assume or reject a license is limited to executory contracts. An executory contract is any agreement that contains materially unperformed obligations respecting both parties where the failure to perform would constitute a material breach. Vern Countryman, “Executory Contracts in Bankruptcy: Part I”, 51 Minn. L. Rev. 439, 460 (1972-1973). Most software licenses are executory contracts because the licensee has obligations to pay license fees, maintain confidentiality of the software, use the software appropriately or other material obligations, and the licensor has obligations such as indemnification and software maintenance and support. A contract which is not executory or a sale is not subject to rejection
Section 365(n) provides a licensee with two options: treat the rejection of the license as a material breach under Section 365(n)(1)(A) and terminate the license agreement, or elect to retain its license under Section 365(n)(1)(B) with certain modifications. Under the first option, the licensee loses its license to the software but obtains a general unsecured claim for money damages under
Section 365(g) of the Bankruptcy Code. Generally, under this first option, licensees receive very little as unsecured creditors and lose the right to continue using the licensed software. The licensee would be in the same position as any other party whose contract was rejected and treated as a general unsecured creditor with a pre-petition claim. Under the second option, the licensee retains a license with the same rights that existed on the date the bankruptcy petition was filed, but all future obligations on the licensor (such as indemnity, new developments, maintenance and support) are terminated, though the licensee is obligated to continue paying license fees to the extent provided in the license. As such, it is very important that the licensee ensure it has sufficient rights under the license as of the date the bankruptcy petition was filed to continue using the licensed software. There are many interesting strategies on how Section 365(n) may be used. We will discuss these strategies later in this paper.
The Intellectual Property Bankruptcy Protection Act seeks to ensure that a licensee of intellectual property receives the benefit of its bargain, even after the licensor’s bankruptcy. Section 365(n) grants a new, statutorily defined license. “Intellectual Property” is defined in the Bankruptcy Code to include mask works, copyrights and patents arising under specific sections of U.S. law as well as patent applications and trade secrets without any geographic distinction.
3 Trademarks are expressly excluded. This exclusion may prove especially troublesome in connection with software distribution licenses where the distributor licensee is distributing a trademarked software product. There is also a concern with copyrights and patents arising under foreign laws because the definition of intellectual property in the Bankruptcy Code does not appear to include copyrights and patents under foreign laws.
If the licensee elects to retain its rights under the license agreement under Section 365(n), it must continue to make royalty payments under the license agreement. If a licensee elects to retain the right to use the licensed software, it must waive any right of setoff it may have for damages resulting from the rejection and any priority claim the licensee may have as a result of its performance under the license. More particularly, under these amendments, the licensor is prohibited from interfering with the licensee’s exercise of its retained rights. But in the event of licensor’s rejection, the licensor is relieved of its affirmative obligations under the license to include duties such as maintenance, training support, providing enhancements or new releases, warranty obligations and indemnification obligations. As such, even with access to the source code, the licensee’s continuing rights to use the software may not be sufficient because the licensee may not be able to maintain and support the software without the licensor’s assistance. The risks require licensees to assess Section 365(n) and related source code escrow strategies.
Because licensees under Section 365(n) only retain the rights that exist at the time of licensor’s bankruptcy, licensees should ensure that the license agreement expressly includes source code and maintenance rights within its scope. The important concept is that you cannot retain rights you never had. We recommend including a current license to the source code corresponding to the licensed software subject to a subsequent future condition based on the conditions for obtaining access to source code. This is in essence a license to use a future interest.
4 We further believe this license to source code should include the right to copy, adapt and modify the source code for licensee’s internal use and support consistent with licensee’s license agreement even though the rights are not triggered until the source code license commences. The future condition subsequent could be tied to obtaining access to the source code held for licensee’s protection under a source code escrow arrangement or other event or combination of events.
License provisions that require delivery of source code, technical documentation, or other intellectual property in the event of the licensor’s bankruptcy are enforceable under these Intellectual Property Bankruptcy Protection Act statutory amendments. Thus, even if the license agreement provides for source code delivery after bankruptcy, the licensee can require the source code to be delivered to it. If the source code was not delivered, the licensee should be able to enforce those “delivery rights” in the bankruptcy court having jurisdiction over the debtor licensor.
Another important right under the Intellectual Property Bankruptcy Protection Act concerns the period after bankruptcy but prior to the licensor’s rejection decision. Upon written request of the licensee, the licensor can be made to perform its obligations under the license agreement.
It should be pointed out that the Intellectual Property Bankruptcy Protection Act does not address the situation of a bankrupt licensee. A debtor-licensee of intellectual property may continue to reject an executory contract and, in such case, return the licensed intellectual property to the licensor.
Below we will discuss how a licensee can protect itself in the event the licensor does not consent to a confirmation of the license agreement by the licensee, i.e., the licensor rejects the license.
License agreements need to contemplate specifically the post-bankruptcy rights the licensee may retain. The continuing obligations of the licensee which survive the licensor’s bankruptcy rights need to be detailed. For example, it may be appropriate to adjust the payment terms to reflect the responsibilities of the parties in the event the licensee elects to retain the licensed software and related source code. Typically, license fees, renewal fees, maintenance fees and so forth, implicitly include royalties for the use of the licensed intellectual property but the royalties are not expressly denominated as such. Licensors need to ensure a continuing revenue stream from the retaining licensee. It is recommended that license agreements should reflect the royalty payments licensee has to pay licensor in such situation where licensee is granted the right to retain the licensed software albeit without any licensor support because if maintenance is not provided by the licensor, then there would probably be no continuing obligation to pay the licensor for the retained use of the software and related source code if the licensee’s only existing obligation, for example, was to pay maintenance fees.
Below is an example of this type of provision:
If the Licensor rejects the License Agreement under
Section 365(n) of the Bankruptcy Code, the Licensee may elect to (i) treat the Agreement as terminated pursuant to Section XXX (Termination) of this License Agreement or (ii) retain Licensee’s rights under the License Agreement, including, without limitation, the right and license to use, adapt and modify the Licensed Software and related Source Code for the full term of the License Agreement and obtain a complete and current copy of the source code corresponding to the licensed software used by Licensee from the Source Code Escrow Agent or, in the event a complete and current copy of the Source Code is not provided to the Source Code Escrow Agent, then directly from Licensor.
In consideration of obtaining a copy of the Source Code under the provisions of this Agreement, Licensee agrees to pay Licensor, in lieu of any other fees, an annual royalty in the amount of $_________ commencing upon Licensor’s receipt of the Source Code and continually thereafter on the anniversary of such receipt for as long as Licensee continues to use the Licensed Software, or any derivative thereof
The royalty payment will differ from situation to situation. If the licensor is not providing any maintenance and support, we believe the royalty should be substantially less than 50% of what would otherwise have been the licensee’s annual maintenance fee obligation. An annual royalty of between 10% and 20% of the annual maintenance fee obligation is likely to be reasonable in most circumstances.
Section 365(n) of the Bankruptcy Code requires careful planning and drafting. In this paper we will address a number of the risks and issues that may arise in connection with Section 365(n). First, we will address specific cases and strategies related to Section 365(n) and then Section 365(c), and then discuss various source code escrow strategies and the perfection of security interests.
II.
Specific Section 365(n) Cases and Strategies A.
Avoiding Liquidated Damages and Foreign Governing Law In this case, EI International had agreed to supply its PMAX software system to Ontario Hydro, a Canadian public utility corporation, as customized to meet Ontario Hydro’s requirements. After El International filed its Chapter II bankruptcy petition, EI International rejected its executory contract with Ontario Hydro under
Section 365 of the U.S. Bankruptcy Code.
Ontario Hydro claimed $3,631,533 in contract damages, mostly to correct deficiencies and omissions to make good the delivered software. EI International only acknowledged Ontario Hydro’s claim to the extent of $176,752.00. Even though the contract in question included a governing law clause requiring Ontario law, the U.S. Bankruptcy court held that U.S. Bankruptcy law governed the dispute in the bankruptcy court. As such, Section 365(n) may be viewed as a strategy for avoiding the application of foreign law under limited circumstances. If the licensor files for bankruptcy protection in the U.S., the U.S. Bankruptcy law will apply to any contracts with foreign parties.
Under the circumstances, the Bankruptcy Court concluded that Ontario Hydro’s claim should be treated like any other claim resulting from a rejected executory contract under Section 365. The rejection of an executory contract under Section 365 rejects the entire contract, including the damage provisions. Therefore, the liquidated damage provision in the contract was determined to be not enforceable because “if liquidated damage clauses were enforceable, there would be no reason for rejection of the contract by a debtor.” Since Ontario Hydro elected to retain the software, rather than treat the rejection as a termination, Ontario Hydro was deemed to waive any right of set-off and any post-petition contract claims. Therefore, the Bankruptcy Court ruled that Ontario Hydro was entitled only to the damages it would have sustained as a pre-petition claim for breach of the contract by EI International. Ontario Hydro’s allowable claim was thus limited to its actual “out of pocket costs” which Ontario Hydro had sustained prior to the filing of EI International’s Chapter 11 petition. Accordingly, Section 365(n) can also be used as a strategy for limiting damages and remedial obligations. This strategy, for example, could be useful in connection with a failed software development project where the licensor is facing significant potential money damages and performance obligations.
B.
Section 365(n) Can Be Used By Licensors as A Collection Strategy Encino Business Mgmt. v. Prize Frize (In re Prize Frize), 32 F.3d 426 (9th Cir. 1994), does not involve information technology, however, it is a very important bankruptcy ruling on whether license fees paid by a licensee for the use of technology, patents and proprietary rights are “royalties” within the meaning of
11 U.S.C. § 365 (n)(2)(B) and, as such, must therefore continue to be paid after the licensor in bankruptcy has exercised its statutory right to reject the contract. Royalty payments are not defined in the Bankruptcy Code, but the legislative history and this court ruling suggest that whether a payment should be considered a “royalty” should depend on the substance of the transaction and not the label This situation is an invitation for disputes requiring specific reference to “royalty payments.”
Under the license, the licensee agreed to pay the licensor a license fee of $1,250,000 which was to be paid as follows: $300,000 at execution and then $50,000 per month until the balance was paid off. The licensor filed for bankruptcy protection under Chapter 11. The licensee stopped making the monthly license fee payments on the grounds that there was a design defect in the technology. The debtor licensor then filed to reject the license agreement and to compel the licensee to elect whether it wished to retain its rights under Section 365(n)(1). The bankruptcy court ordered that, in the event the licensee elected to retain its rights under the agreement pursuant to Section 365(n)(1), it must pay all license fees presently due, pay the balance in monthly installments and waive any and all rights to set-off with respect to the contract under applicable non-bankruptcy law and any claim under
Section 503(b) of the Bankruptcy Code arising from performance under the agreement.
When the licensee elected to retain its rights, it was then obligated to make all royalty payments due under such contract. The licensee argued that the license agreement distinguished between royalties and license payments and that the license fees are not royalty payments which must be paid in the event of retention. The bankruptcy court noted that Section 365(n) speaks repeatedly of “licensor” and “licensee” with the clear implication that payments by licensee to licensor for the use of intellectual property were “licensing fees” or “royalties” and, as royalties, must be paid by the licensee who elects to keep its license after the licensor’s bankruptcy. The court raised the question whether an allocation would have been proper in view of licensor’s other contract obligations for which it was no longer responsible; however, the issue was not raised by the parties and therefore not considered in the ruling. This court ruling supports our recommended allocation and specification of the “royalty payments.”
The Encino case suggests how Section 365(n) may be used to collect license fees and royalties. For example, assume that the licensor is a very small company or otherwise unable to fund a legal collection lawsuit. The licensee asserts grounds, whether real or just a pretense, for not paying licensor license fees that are otherwise due. Licensee knows that licensor is experiencing financial problems and does not have the wherewithal to commence a collection lawsuit against licensee. Licensor can use Section 365(n) and the bankruptcy court to collect licensee’s debt to licensor to the extent licensee elects to retain the licensed intellectual property.
C.
Section 365(n) Can Affect The Timing and Strategy For Acquiring IP Assets in a Bankruptcy Proceeding CellNet Data Systems had a license agreement with BCN Data Systems. Under the license agreement, CellNet received a royalty equal to three percent of BCN’s gross revenues from CellNet’s technology. CellNet sold its intellectual property assets to Schlumberger while CellNet was in bankruptcy. Schlumberger excluded the BCN license agreement and other CellNet license agreements from the intellectual property assets Schlumberger acquired from CellNet. This purchase effectively severed the license agreements from the intellectual property assets Schlumberger acquired. Following Schlumberger’s purchase, CellNet rejected the license agreements with BCN as part of its bankruptcy proceeding.
After CellNet rejected its BCN license agreement, BCN elected to retain its rights under Section 365(n). Under Section 365(n) BCN is required to make all royalty payments due under the contract for the duration of the contract. By its election under Section 365(n), BCN was permitted to continue to use the licensed intellectual property originally licensed from CellNet but was required to pay the royalties due under the license agreement. Even though Schlumberger acquired CellNet’s intellectual property assets in the bankruptcy proceeding, Schlumberger was not entitled to the royalties related to the license agreement assets that had been excluded from Schlumberger’s assets that it acquired from CellNet. BCN paid the royalties to the debtor CellNet rather than Schlumberger.
It appears that neither Schlumberger nor CellNet fully appreciated the potential risk that BCN might elect to retain the licensed technology under Section 365(n) subject to the terms of the CellNet license agreement which CellNet rejected. This result speaks to the need for carefully analyzing the risks of Section 365(n). For example, it may have been more prudent to acquire the license agreements as part of the acquisition in the bankruptcy proceeding then terminate the license agreements after the acquisition closed, to the extent the termination provisions permitted such termination. This may not have been possible but it is the type of analysis that should have been conducted.
D.
Must Recognize That Trademark Rights are Not Covered by Section 365(n) The bankruptcy court concluded that once a license has been rejected the counter-party may not continue to use the trademarks. Raima UK sought to continue to market and sell software products under trademarks owned by the debtor, Centura Software Corporation. Raima UK also sought software updates and documentation. Under Section 365, if a contract is rejected the debtor is deemed to have breached it, and the bankrupt estate loses any benefit from the contract. Raima UK selected to retain its protected rights to market and sell Raima Software. However, since Section 365(n) does not extend to trademarks Raima UK is left with a Section 365(g) claim for damages resulting from being unable to use the trademarks in its business. The court determined that Congress had unambiguously indicated that trademark licenses are to be excluded from Section 365(n). Raima Software lost its trademark rights but is entitled to file an unsecured pre-petition claim for damages resulting from not being able to use such trademarks. The court also denied Raima any post-petition performance respecting enhancements because as the result of the election to retain the distribution license Centura Software had no obligation to support the licensee.
The fact that Section 365(n) does not include trademarks may prove extremely important. For example, assume that your client has an exclusive trademark license that is critical to your client’s business plans. The licensor experiences significant financial difficulties. Four petitioners file an involuntary bankruptcy proceeding against the licensor. If the involuntary bankruptcy proceeding goes forward, there is a significant risk that the licensor will reject the exclusive license and the licensee will lose its trademark rights notwithstanding already paying the licensor millions of dollars. Under these circumstances the licensee is likely to determine it is compelled to acquire the trademark rights from the licensor. The purchase price was based on satisfying the licensor’s creditors to avoid any liens being filed against the trademark assets and otherwise have the involuntary bankruptcy proceeding against the licensor dismissed. Section 365(n) can require strategies like this to be implemented.
III.
Strategies Related to Section 365(c) of the U.S. Bankruptcy Code Is a software license assumable by a licensee in the event the licensee seeks bankruptcy protection? The risk of non-assumption may prove quite significant.
A.
The In re Sunterra Corp. Ruling The importance of the assumption question respecting software licenses to debtor licensees was emphasized by
In re Sunterra Corporation (RCI Technology Corp. v. Sunterra Corp.), 361 F. 3d 257 (4th Cir. 2004). There the Fourth Circuit reversed the district court by holding that the debtor-in-bankruptcy did not have the right to assume the RCI software license in question without the software licensor’s consent. We have never seen this risk addressed in any software license. As such, this ruling may prove very significant because it raises the need for new contract protection to address this “assumption” risk.
In this
Sunterra case, the Fourth Circuit found that
Section 365(c) of the Bankruptcy Code does not permit Sunterra, the debtor licensee, to assume its nonexclusive software license with RCI without RCI’s consent to the assumption. Sunterra was precluded from assuming its RCI software license to use and modify RCI’s Premier Software. Under the RCI software license agreement, Sunterra owned any “enhancements” and granted RCI a license to use the Sunterra Enhancements. Sunterra had invested millions of dollars in the Premier Software. Under the circumstances, the RCI software license had become critical to Sunterra’s operations; however, its ability to assume the license as part of its plan to exit its bankruptcy was dependent on the licensor’s consent.
In the Sunterra bankruptcy proceeding, RCI filed a motion with the bankruptcy court to deem its license with Sunterra rejected, and RCI asserted further that, since it had refused to consent to the assumption of the license agreement, the court was required by law to deem the license rejected.
In ruling against Sunterra and its intent to assume the RCI license, the Fourth Circuit followed the “literal test” applicable to the interpretation and application of
Section 365(c) of the Bankruptcy Code. The “literal test” provides that a debtor in possession may not assume an executory contract over a nondebtor’s objection if applicable law (e.g., the copyright laws) would bar assignment to a hypothetical third party. This prohibition applies even where the debtor in possession has no intention of assigning the contract in question to any third party. Software licenses are copyright licenses. Copyright law prohibits the assignment of a copyright license without the consent of the copyright holder licensor. As such, Section 365(c) places the licensee at risk if the licensee ever seeks to assume a particular software license in a bankruptcy proceeding. The assumption option might not be available to the licensee.
The Fourth Circuit determined that the RCI software license was an executory agreement. In so ruling, the Fourth Circuit applied the “Countryman Test” and found that the RCI software license was executory at the time Sunterra applied for bankruptcy protection because each party owed at least one continuing material duty to the other under the Agreement. In particular, the parties each possessed an ongoing obligation to maintain the confidentiality of the source code of the software developed by the other. As such, the Fourth Circuit found that Section 365(c), under the literal test, prohibits Sunterra from assuming the RCI license agreement without RCI’s consent.
Under Section 365(c), the Fourth Circuit considers “assumption” and “assignment” in connection with an executory software license to be independent acts both of which acts require the licensor’s consent.
B.
Managing The Non-Assumption Risk The non-assumption of a software license in a bankruptcy is likely to be a very rare event. However, in view of the catastrophic consequences in the event of such a non-assumption, consideration needs to be given to managing the assumption risk.
The non-assumption risk should be manageable by a contract provision.
5 Below is a simple provision dealing with the non-assumption risk.
Assumption. Notwithstanding any provision to the contrary, in the event Licensee declares bankruptcy and elects to assume this License Agreement in the bankruptcy proceeding, Licensor hereby consents to such assumption by Licensee provided Licensee agrees to comply with all of the terms and conditions of the License Agreement.
This provision starts with the proverbial “notwithstanding any provision to the contrary” because most license agreements provide for termination in the event of bankruptcy even though such provisions are
ipso facto invalid and unenforceable pursuant to
Section 365(e) of the Bankruptcy Code.
6 The licensor’s consent to an assumption only occurs if the licensee makes the decision to assume the license. The provision does not obligate the licensee to assume the license. In most bankruptcy situations, it is likely that the licensee will reject most software licenses; however, there is a contingent risk respecting assumption for which the licensee should seek protection.
C.
Conclusion The Sunterra ruling underscores the potential importance of the assumption decision to software licensees in bankruptcy proceedings. Software licensees need to contemplate the risk of non-assumption and in some situations should seek to manage the risk by including a contract provision that obtains the licensor’s advance consent to licensee’s assumption of the license agreement in the event licensee makes the decision to assume the license during a bankruptcy proceeding.
IV.
Source Code Escrow Agreements A.
General The purpose of source code escrow arrangements is to have a current and complete copy of the source code corresponding to the licensed software held in safe-keeping for the benefit of the licensee in the event the licensor ceases business operations or is no longer able to maintain and support the licensed software. The source code escrow arrangements should be designed to permit the licensee to take over the licensor’s support obligations. In addition to obtaining access to the source code there are a number of other strategies that may be implemented to place the licensee in as strong a position as possible if the licensor fails or is otherwise unable to support the licensed software.
Possession of source code is essential to software licensees who intend to modify the software. Licensees without a present intention to make software modifications, however, often regard source code as a necessary form of insurance against a situation in which they are unable to continue using the software because the licensor is unable or unwilling to correct errors or otherwise support the product. Possession of the source code, customers believe, will enable them to step into the breach and keep the system up and running.
Because the uses that can be made of source code (e.g., modifying software and discerning proprietary vendor algorithms and other trade secrets) are fundamentally different from uses ordinarily made of object code (data processing), any licensor that makes source code available to a licensee should include in its license agreement a provision that carefully and precisely defines the specific rights in the source code that the licensee is permitted to exercise. For example, the licensor may wish to permit the licensee to use only the single copy of source code provided and to prohibit the licensee from making hard copies or electronic copies for other than machine use and archival purposes. As noted earlier, the licensor may wish to authorize only certain types of modifications to the software and to prohibit all other modifications. It is fairly common to limit changes to those necessary to maintain and support the software internally. In almost all circumstances, the licensor will wish to prohibit disclosure and distribution of source code. In no event should source code be provided under a license agreement that gives the licensee sweeping rights “to use the software” without making special provision for source code and the scope of license applicable to the source code.
Licensors that do not routinely make source code available to their licensees are often prepared to respond to licensee requests to deposit source code into an escrow for the licensee’s benefit and protection. A source code escrow is an arrangement by which the licensor places source code in the hands of an independent third party for safekeeping. Then, in the event of the occurrence of any one of a number of enumerated events, such as the licensor’s business cessation or discontinuance of support for a product line, the licensee is entitled to receive a copy of the source code. The user should seek to ensure that the source code and all other information the user will need to maintain the software itself are deposited into escrow. The following issues generally arise in connection with creating a source code escrow.
1.
Escrow Agent Selection The parties must select an escrow agent. A number of companies are in the source code escrow business and are equipped to maintain source code on electronic media in a secure, controlled environment. Many large licensors have established source code escrows and merely need to notify the escrow agent of additional beneficiaries as they get new licensees.
2.
Managing The Non-Assumption Risk The parties must allocate responsibility for payment of the costs of the escrow. Typical costs include an initial setup fee, an annual maintenance fee, and fees in connection with individual transactions such as deposits and withdrawals. The failure to pay the escrow fees on an ongoing basis is the most common reason for escrow arrangements to fall apart. One way to address this problem is for the licensee to have the right to pay the escrow fees and credit such payment against any other fees due to the licensor. To do this, the licensee should seek to be in contractual privity with the escrow agent and receive notice of nonpayment.
3.
Conclusion The licensee must decide whether it is necessary to verify the contents of licensor deposits into the escrow account. One method of verification involves witnessing compilation of the deposited source code into usable object code. Compilation may be demonstrated by the licensor or by any of the companies in the source code escrow business. Sometimes the quality of the code is inspected before it is deposited for the purpose of assessing the source code risk. If the source code is not intelligible, added precautions may be considered. One strategy is to require the filing of a video tutorial with the source code that explains the code in detail. Another strategy is for the licensee to have the right to hire key licensor programmers irrespective of any prohibition against soliciting the employees of either party in the event of a triggering condition granting access to source code. These strategies are discussed more fully below.
4.
The In re Sunterra Corp. Ruling The parties should agree on the frequency with which the deposit must be updated. Although customers will want to have the latest version of source code in the event of a licensor default, state-of-the art software often has not matured and releases occur frequently. Licensors of such software may resist an obligation to deposit each new release, and a compromise requiring not more than a specified number of deposits per year might be reasonable. The objective should be to ensure that the source code deposit corresponds substantially with the licensed software then being used by the licensee.
5.
Managing The Non-Assumption Risk The parties must specify the events that will permit the customer to receive the source code from the escrow agent. These normally include a licensor’s failure to perform a software support obligation and a cessation of the licensor’s business, but may also include other events that endanger the licensor’s ability to perform its obligations even though there has as yet been no default.
6.
Conclusion The parties must specify the procedure by which the licensee can obtain the source code from the escrow agent. Typical procedures require written notice by the licensee to the escrow agent describing the event that has entitled the licensee to receive the source code. The escrow agent in turn gives the licensor written notice of the licensee’s claim. If the licensor does not dispute the licensee’s claim, the source code is released. Alternatively, a procedure must be agreed upon to resolve a licensor dispute of the licensee’s claim, and arbitration on an expedited basis is a common means.
B.
Supplementary Agreement Under Public Law 100-56, the separate source code escrow agreement is referred to as being “supplementary” to the contract between the licensor and licensee. It is a good idea to make sure both parties recognize that the source code escrow agreement is acknowledged by both parties to be a supplementary agreement within the meaning of
Section 365(n) of the Bankruptcy Code to make clear that the benefits of Section 365(n) are intended by the parties to apply. We prefer three-party source code escrow agreements so that the licensee as well as the licensor are in privity with the escrow agent. In a three-party contract the licensee can have the right to pay any escrow fees the licensor has failed to pay and deduct any such payment from any other payment obligation the license has to the licensor. This payment right recognizes that the most common reason for escrow arrangements to fall apart is non-payment of escrow fees. In the absence of a three-party agreement, the software escrow agreement may be incorporated in the license agreement with contract provisions requiring that the source code deposit be kept current and escrow agreement remain in effect during the term of the license.
C.
Source Code Risk It should be emphasized that source code escrow arrangements carry some definite risks. For complex systems, even with source code access, there are definite concerns that software maintenance may prove to be commercially impractical because the coding may be too difficult to comprehend in a reasonable amount of time. Assessing the source code risk may require a review of the code along with other considerations.
If the program code is not understandable and well-documented, you may consider other strategies to improve the likelihood that you will be able to maintain the code. One strategy is to require that the licensor prepare a tutorial video where the programmers would “walk” the licensee through the code so that the program code is understandable.
7 Likewise, in addition to the source code, technical documentation that will aid in understanding the program code should be stored. During contract negotiations you should seek to make sure everything the licensee will need to assume software maintenance and support is stored in escrow or otherwise provided.
D.
Waiver of Prohibition Against Hiring There are a number of contract provisions that should be considered in connection with software source code escrow strategies. Typically, the license agreement is likely to contain a prohibition against hiring licensor employees. Licensor’s programmers are likely to be the most knowledgeable personnel concerning the program code. During negotiations the licensee should seek to identify the most knowledgeable programmers and expressly waive any prohibitions against hiring them in the event licensee is granted access to the source code.
E.
Waiver of Prohibition Against Reverse Engineering Another contract provision to consider is the prohibition against decompilation, disassembly, translation or other reverse engineering. This type of prohibition against reverse engineering is included in most software licenses. It does not make any sense if the licensee obtains access to source code. Accordingly, we recommend that the prohibition be waived and the licensee be granted an express right to decompile, disassemble, translate and otherwise reverse engineer the licensed software in the event the licensee is granted access to source code. This may provide the licensee with added rights that may prove helpful. For example, if the source code provided is not current, this right may provide the licensee with the rights necessary to reverse engineer or otherwise derive the source code for changes not included in the delivered source code. By matching the software based on the delivered source code with the software the licensee is actually using, the licensee should be able to generate a listing of changes. This listing may be used to obtain current source code from the licensor or as a basis for reverse engineering the changes.
F.
Section 117 Rights Another provision to consider relates to Section 117 of the Copyright Act which gives the owner of a copy of the copyrighted software the right to modify the software to the extent necessary to utilize the software and the right to copy the software for archival purposes. Most court rulings have held that licensees do not have the rights conferred under Section 117 because they are not owners of the copy of the software licensed to them. To the extent the licensee obtains source code we believe the licensee should be granted all of the rights under Section 117 with respect to the software and related source code licensed to licensee. These rights will further strengthen licensee’s rights to modify and adapt the software in the event the licensee must take over maintenance and support of the licensed software.
V.
Perfecting Security Interests and Assignments in Bankruptcy Proceedings A.
Perfecting a Security Interest in Copyrighted Material 1.
Registered Copyrights Capitol Federal Savings and Loan Association had filed UCC-1 financing statements in California, Colorado and Utah in connection with its extending a line of credit to Peregrine. Capitol’s UCC-1 statements and security agreement described the collateral as “[a]ll inventory consisting of films and all accounts, contract rights, chattel paper, general intangibles, instruments, equipment, and documents related to such inventory, now owned or hereafter acquired by the Debtor.” No security interest had been filed in the U.S. Copyright Office.
The Court noted that the comprehensive scope of the Federal Copyright Act’s recording provisions, along with the unique federal interests they implicate, support the view “that federal law preempts state methods of perfecting security interests in copyrights and related accounts receivable.” To the extent Pergrine has valid copyrights, the Bankruptcy Court was ordered to permit Peregrine to exercise its avoidance powers under the Bankruptcy Code over interests in which Peregrine has not filed its security interest with the U.S. Copyright Office. It should be noted that this ruling relates to perfecting a security interest in registered copyrights. To the extent that a security interest is taken, for example, in trade secrets, unregistered copyrights and other intangibles, those security interests need to be perfected pursuant to state law by filing a UCC-1 financing statement.
2.
Unregistered Copyrights Aerocon Eng’g, Inc., v. Silicon Valley Bank (In re World Aux. Power Co.), 303 F.3d 1120 (9th Cir. Cal. 2002) addresses the perfection of security interests in the debtor’s unregistered copyrights. The Ninth Circuit affirmed the district court’s ruling determining that Silicon Valley Bank had a perfected security interest in the debtor’s unregistered copyrights. The ruling concerns the perfection of security interests in unregistered copyrights. Here the security agreement and financing statement also covered “[a]ll copyright rights, copyright applications, copyright registrations, and like protections in each work of authorship and derivative work thereof, whether published or unpublished, now owned or hereafter acquired.”
The Ninth Circuit adopted Peregrine and held that for registered copyrights the only proper place to file a security interest is in the Copyright Office, but noted there is no way for a secured creditor to perfect a security interest in unregistered copyrights by recording in the Copyright Office. Only the UCC state filing system creates a filing system applicable to unregistered copyrights. As part of its rationale the Ninth Circuit noted that the Copyright Act contemplates that most copyrights will not be registered. Since a copyright is created every time people set pen to paper, or fingers to keyboard, and affix their thoughts in a tangible medium, writers, artists, computer programmers, and web designers would have their hands tied down to keep them from creating unregistered copyrights all day every day. The Copyright Act is noted by the Ninth Circuit to set up a regime in which most copyrights won’t ever be registered.
The lesson learned is that a secured creditor may perfect a security interest in an unregistered copyright in accordance with state law, by filing a UCC-1 financing statement pursuant to state law. To the extent the UCC-1 seeks to cover intangible intellectual property rights (e.g., trade secrets, confidential information, domain names, etc.) we recommend that unregistered copyright rights be expressly included in the description of the covered collateral.
3.
Scope of Perfected Security Interest in Registered Copyrights The Bankruptcy Court in
In re Avalon Software, Inc., 209 Bankr. 517 (D. Az. 1997) determined that the Imperial Bank failed to perfect its security interest in Avalon’s copyrighted software and did not have a perfected security in any of Avalon’s software, modified software, licenses, manuals or agreements relating to the distribution of the software and proceeds therefrom.
Avalon had borrowed money from Imperial Bank. The bank had filed UCC-1 financing statements with the Arizona secretary but never filed a financing statement, its security agreement, or any other document evidencing its security interest with the U.S. Copyright Office. The Court notes that the proper method to obtain a perfected security interest with the United States Copyright Office. Filing with the Copyright Office and use of an “after-acquired” clause would have meant the Bank had perfected its security interest in the copyrights and copyrighted material, and the proceeds therefrom. As a result the court determined that a long list of assets were not subject to the Bank’s security interest, including VAR Distributor Agreements and the proceeds therefrom. On the other hand, the court determined that Avalon’s maintenance, consulting and serving agreements did not significantly include the sale or licensing of any tangible “intellectual property” and, as such, were subject to the Bank’s perfected security interest.
4.
Third Party Software Modifications Not Covered By Security Interest In re: C TEK Software, Inc., 127 B.R. 501 (Bankr. D. N.H. 1991); Copy L. Rep. (CCH) ¶ 26,796 (Bankr. Ct. D.N.H. 1991) case deals with a number of very important issues related to security interests and bankruptcy. The New York State Business Venture Partnership perfected a security interest in CTek’s computer software known as ClienTrak. The security interest covered “the source code and all ownership rights to the computer software ClienTrak including copyrights 1983, 1984, 1985, 1986 and 1987.” Later, after granting the security interest CTek entered into a worldwide right to sell and develop the ClienTrak software. In consideration of the distribution license, the distributor agreed to pay CTek royalties which would decrease in amount over time as the distributor made changes to the software. In particular, CTek gave the distributor the right “to produce, copy, distribute and market derivative versions of the software and documentation without limitation.” However, the distributors modified version of the software were not subject to the security interest held by the New York State Business Venture Partnership. In the software industry, a distribution agreement like this one effectively transfers the technology from the licensor to the distributor licensee. The New York Business Venture Partnership made a big mistake by not ensuring that its security lien was applicable to the improved software.
The issue before the Bankruptcy Court concerned the extent of the security interest the New York State Business Venture Partnership has in the source code in light of the modifications made by the distributor after the Partnership’s security interest had been perfected. The dispute focuses on the changes made to the ClienTrak software after version 3.7.2.B. The Bankruptcy Court relied on
Stewart v. Abend, 495 U.S. 207, 110 S. Ct. 1750, 109 L. Ed. 2d 184 (1990), declaring that: “the aspects of a derivative work added by the derivative author are the author’s property, but the element drawn from the pre-existing work remains on grant from the owner of the pre-existing work.”
The Bankruptcy Court also observed that “[w]orks substantially derived from prior works, whether pre-existing works are copyrighted or in the public domain, are also subject to copyright protection so long as the derivative work itself is original.” The Bankruptcy Court believes that “bug” fixes can have sufficient originality to be independently created copyrightable subject matter, i.e., that they are not “trivial” in a copyright sense. The Court determined that the software modifications made by the distributor’s programmers required independent effort and judgment. In fact, the Bankruptcy Court, relying on expert proof, noted that “it is more difficult to modify another programmer’s source code than to create one’s own.” Since versions 3.7.2.B of the ClienTrak software, which is subject to the liens of the New York State Business Venture Partnership can be severed from the current derivative work version of the ClienTrak software, the Court ruled that the security interest did not cover the software modifications made by the distributor.
Therefore, by virtue of being able to sever the modifications from the current version (presumably by simply referring to an archival copy of the original software) the distributor was able to overcome the doctrine of accession. The Bankruptcy Court further ruled that the distributor has a license from CTek to copyright derivative software, the software modifications meet the originality requirements of the copyright laws and the distributor owns those software changes free and clear of any lien from the New York Business Venture Partnership.
As a result, the security interest held by the New York Business Venture Partnership was greatly devalued because it did not apply to the enhanced software. It only applied to the older version which had become technologically obsolescent.
B.
Perfection of Security Interests in Issued Patents Section 261 of the Patent Act provides that “[a]n assignment, grant or conveyance shall be void as against any subsequent purchaser or mortgagee for a valuable consideration, without notice, unless it is recorded in the Patent and Trademark Office within three months from its date or prior to the date of such subsequent purchase or mortgage.” The Patent Act does not reference a requirement to file a security interest. Only transfers of ownership interests need to be recorded with the PTO. A security interest in a patent does not involve a transfer of the rights of ownership and is not an assignment, grant or conveyance. The Ninth Circuit references the procedures to perfect a security interest in copyrighted materials with the Copyright Office but does not suggest such procedure is wrong or not necessary, but does note that the Copyright Act governs security interests. The Ninth Circuit suggests that security interests relating to copyrighted materials need to be perfected by filing with the Copyright Office while security interests in a recorded patent do not have to be filed with the PTO, but rather in accordance with Article 9. Accordingly, the security interest in the debtor’s patent, timely filed under Article 9 before the filing of bankruptcy, had priority over the trustee’s claims.
VI.
Assignment of Intellectual Property Assets in Bankruptcy A.
General Section 365(c) of the Bankruptcy Code establishes two conditions that must be met before a debtor in possession is prohibited from assigning a license to which the debtor was a party before filing for bankruptcy protection. First, under applicable law the licensor non-debtor must be permitted to refuse performance of the license from another party. Most software licenses, for example, are not assignable unless the licensor has consented to the assignment. Second, the non-debtor licensor does not, or has not, already consented to an assignment.
B.
Patent Licenses Under Federal law non-exclusive patent license agreements are personal to the licensor and are not assignable unless expressly made so in the agreement.
In
Everex Sys. v. Cadtrak Corp. (In re CFLC, Inc. ), 89 F.3d 673 (9th Cir. 1996), the Ninth Circuit ruled that the non-exclusive patent license held by the bankruptcy estate was not assignable as part of the assets sold by the debtor in bankruptcy. CFLC had been granted a non-exclusive license to use certain computer graphics technology for which Cadtrak held a patent. In the bankruptcy proceeding CFLC sought to assume the license and assign it. Cadtrak opposed the assumption and assignment. Under federal law a non-exclusive patent license is personal and nonassignable. The license could not be assumed and assigned without Cadtrak’s consent. The free assignability of a non-exclusive patent license without the consent of the patent holder was deemed to be inconsistent with the patent monopoly and to be inconsistent with federal policy.
The situation respecting the assignability of exclusive patent licenses is less clear. Some courts treat exclusive patent licenses as conferring property rights and not merely personal rights.
8 In such situations, Section 365(c) should not preclude the assumption or assignment of an exclusive license by the debtor. Other courts have treated the assignability of even exclusive patent licenses as requiring the consent of the patent owner because otherwise an exclusive license would be equivalent of an outright assignment of the patent.
9 C.
Copyright Licenses Non-exclusive copyright licenses, like non-exclusive patent licenses discussed above, are not freely assignable by debtors unless the copyright licensor consents.
10 However, like patents, it is less clear whether an exclusive copyright license is assignable.
11 D.
Trademark Licenses Trademark licenses are generally viewed to be personal and non-assignable without the consent of the licensor.
12 VII.
Automatic Stay One of the main automatic features of a bankruptcy filing is the automatic stay which is triggered upon filing to preserve the bankruptcy estate until the debtor’s property and creditors can be brought together and the competing rights in the bankruptcy estate adjudicated. The automatic stay enjoins the commencement of any action by a creditor against the debtor or the debtor’s bankruptcy estate or the continuation of any action by or against the debtor. Furthermore, under the automatic stay any non-debtor licensors or licensees under a license must perform their obligations if non-performance would damage the debtor’s bankruptcy estate. The executory contracts remain in effect and creditors are bound to honor them until they are assumed or rejected.
Once a bankruptcy petition is filed an automatic stay goes into effect. The automatic stay under
Section 362 of the Bankruptcy Code is an injunction against most creditor actions to collect debts from a debtor. The automatic stay is one of the most fundamental debtor protections provided by the bankruptcy laws and may be compromised only when good reason exists to do so.
13 The automatic stay provisions work to protect the debtor against certain actions by creditors, including: (1) commencing or continuing judicial proceedings against the debtor; (2) actions to obtain the debtor’s property; (3) actions to create, perfect or enforce a lien against a debtor’s property; and (4) set-off of indebtedness owed to the debtor before commencement of the bankruptcy proceeding.
14 Secured creditors may petition the bankruptcy court for relief from the automatic stay upon a showing of good cause. The bankruptcy court may give a creditor relief from the stay if the creditor can demonstrate that the stay does not provide adequate protection or if the stay places the creditor’s interest in certain property at risk.
15 Violating the automatic stay may have severe consequences. The Ninth Circuit in
In re: Computer Communs., 824 F.2d 725 (9th Cir. 1987), affirmed a finding that the non-debtor party to a technology development agreement with a termination-upon-bankruptcy clause had violated the automatic stay by unilaterally terminating the agreement. The debtor was awarded compensatory damages and punitive damages.
VIII.
Invalidity of Termination-Upon-Bankruptcy Clauses Section 365(e)(1) of the Bankruptcy Code provides that an executory contract of the debtor may not be terminated or modified at any time after commencement of the debtor’s bankrupt proceeding solely because of a provision in such contract that is conditioned on any of the following:
(1) the insolvency or financial condition of the debtor at any time before the closing of the bankruptcy proceeding;
(2) the commencement of a bankruptcy proceeding;
(3) the appointment of or taking possession by a trustee in a bankruptcy case or a custodian before commencement of a bankruptcy proceeding.
16 Section 365(e) generally makes clauses that terminate because of the “insolvency” or “financial condition” of the debtor, or due to the filing of a bankruptcy petition unenforceable once a bankruptcy case was commenced. Section 365(e) generally makes
ipso facto clauses in executory contracts unenforceable.
17 Section 365(e)(2)(A) basically provides that termination-upon-bankruptcy provisions are enforceable if (i) applicable nonbankruptcy law does not permit the licensee to assign the license without the licensor’s consent and (ii) the licensor has not consented. In this regard, the licensor may give advance consent under the terms of the license.
18 Most executory contracts contain termination-upon-bankruptcy provisions. Most importantly, it is important not to rely on these termination provisions and to recognize they are likely to be unenforceable. One reason for keeping these clauses in the contract is that the Bankruptcy Code could change to reinstate the old rule enforcing these provisions. Another reason is that the invalidity only arises if a bankruptcy is actually filed.
19 IX.
Conclusion The risks relating to bankruptcy need to be fully considered in information technology transactions. In this paper, a number of risks and strategies under U.S. Bankruptcy Law are discussed as well as source code escrow strategies to protect licensees and issues relating to perfecting security interests in connection with information technology transactions.
Footnotes — Appendix 4A[49]:
